Capital markets News

OCC: regulators attracting crypto licensees may signal over-accommodation

crypto regulation new old rules

Yesterday, Michael Hsu, Acting Comptroller of the Currency, said that regulators attracting numerous crypto licensees might be overly accommodating. During a talk at Harvard Law, he discussed the concept of bringing cryptocurrency into the regulatory perimeter.

In his view, that can mean crypto is forced to conform to current regulatory standards. Alternatively, regulation should adjust to crypto, acknowledging new possibilities.

In the early 2000s, regulators intended to shield the banking system from structured finance and shadow banking by pushing it outside the perimeter. That’s a mistake they don’t want to repeat.

However, because there are numerous regulators with different regulatory perimeters, fintechs can select one over another. In Hsu’s view, this could lead to a winner’s curse. “The line between well-adapted regulation and unduly accommodative regulation can be a blurry one,” said Hsu. 

“Attracting crypto licensees and activities can be a sign that a regulator may have over-accommodated the industry.” He made no mention of any regulator in particular. But it’s hard to miss that the crypto industry strongly prefers the CFTC over the SEC.

He discussed the OCC’s Interpretive Letter issued in November 2021 requiring national banks to first request a supervisory non-objection letter before undertaking crypto activities. While the Federal Reserve introduced a similar requirement in August, Hsu and the OCC were ahead of the game.

With banks coming to the OCC regarding their digital assets activities, the regulator has a clearer view of where supervisors need to take steps in the near term.

The first is managing liquidity risk for deposits from crypto-asset companies, including stablecoin issuers. We’re guessing he means the risk of rapidly withdrawing substantial deposits. 

The other two areas are crypto trade facilitation and crypto custody. Apparently, interagency efforts are advanced on the first two, but surprisingly, not on custody.

He warned that the crypto industry might want to hold the champagne until they read the fine print on these points. And he gave a hint about the OCC’s approach.

Regarding safeguarding the banking system and protecting customers, “Guardrails and gates can help to achieve that,” said Hsu. “The more novel and riskier an activity, the tighter a bank’s limits and controls need to be to meet supervisory expectations. The converse is also true.”   

Image Copyright: dmitrydemidovich / 123rf