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Michael Hsu has made no secret of his concerns about the positive steps taken regarding cryptocurrency activities by his predecessor in the Office of the Comptroller of the Currency, who came from that company. In an initial interview with reporters, Hsu, acting controller of the currency, said he would reconsider some past decisions, including those regarding crypto. But in a speech to a key industry group, he questioned – forcefully – the meaning and logic of much of what has happened in crypto recently.

“Innovation for innovation… risks creating a mountain of gold from fools,” Hsu, a career financial regulator, told members of the Blockchain Association. The lobby group’s board of directors consists of some of the major crypto companies, including Binance.US, Ripple, Kraken, and Anchorage. So Hsu was in the lion’s den, but didn’t blink.

In his speech, Hsu compared many elements of the current state of crypto to developments in US finance as the 2008 financial crisis approached that triggered the Great Recession. He recalled his experience with the staff of the Securities and Exchange Commission at that time.

“We were at the forefront of the rapid rise and industrialization of innovations in derivatives, securitization and trading,” said Hsu. “We have seen innovations that have made real improvements for clients and risk managers; but we have also seen innovations that would jeopardize the companies that promote them and amplify the 2008 crisis. I see similarities with emerging risks in the crypto and DeFi space today. ” [Emphasis added.]

(“DeFi” generally refers to peer-to-peer financial services run on public blockchains that aim to eliminate middlemen like banks.)

Why target crypto now:

Acting Controller Hsu said the fields of crypto and DeFi are still at a point where a potential crisis can be avoided – if industry leaders and innovators take a look at what they’re doing and why.

“Breakneck” doesn’t begin to describe the pace of current activity in the crypto world as a whole. In his speech, Hsu described three main areas of concern and then provided three points to guide crypto companies in the development of products and services.

(Read more: New OCC Chief Targets Fintech / Banking Transactions and Crypto for Review)

Three reasons why Hsu sees a crisis brewing

Hsu was inspired by a 2010 book on the financial crisis, Gillian Tett Fool’s Gold: The Story of JP Morgan and How Wall St. Greed Corrupted His Bold Dream and Created Financial Catastrophe, to express their concerns. He also clarified that his own experiences watching the near-merger have affected the way he views these new activities.

First of all, he stressed that “innovation is exciting because it often starts with trying to solve an intractable problem and in doing so unleash great potential”.

The creation of the credit default swap, he noted, began with the aim of hedging the risk of borrower default, a reasonable goal.

But a dozen years later, so much financial engineering had taken place that swaps had spawned all kinds of new and increasingly opaque financial instruments. Likewise, as crypto and DeFi have grown today, they are also becoming less understandable.

Likewise, some arguments put forward for crypto and DeFi are questionable, in Hsu’s opinion. For example, “many believe that crypto / DeFi can dramatically increase financial inclusion,” he said. He noted that some observers of mainstream financial services may find the idea laughable. But he said discontent could support such a development. “Crypto / DeFi can pose a threat to the status quo as many people feel ignored, taken for granted or exploited by banks,” Hsu said.

Second, concepts started with good intentions before the crisis became perverted.

“The original idea – to create an instrument that could improve risk management and thereby lower the cost of credit – has been turned on its own, shrouded in impenetrable math and jargon, and overburdened with returns and fees to ensure growth, ”Hsu said. “It was innovation for innovation.

Hsu is concerned that crypto / DeFi will evolve in the same way. For example, several crypto exchanges have recently started offering “stable savings accounts” with APYs between 4% and 14.5%.

“How are the returns generated? It is difficult to get clear answers that do not quickly turn into cryptographic language.

– Michael Hsu, Acting Currency Controller

Third, Hsu is concerned that a sudden unwinding may occur in crypto / DeFi as the financial crisis spreads. This could especially happen if the growing base of crypto buyers becomes more common and vulnerable to scams and downturns.

“Until recently, most users were die-hard believers in the technology and therefore are both aware of the risks and ready to forgive them,” Hsu said. As traditional consumers, “with regular expectations of safe and healthy money” come to represent the majority of buyers, they will dominate and elicit feedback.

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Three lessons to control crypto risks

Hsu described three ways to avoid the risks he foresees.

First, “financial innovation must be rooted in a goal”.

Innovators should be able to say why an identified problem should be solved through innovation. Regarding increasing inclusion through crypto / DeFi, Hsu said that while he is in favor of improving inclusion, he has yet to hear anyone satisfactorily explain how esoteric technology blockchain could help.

“How does it help expand access to banking services and credit? ” He asked. “How does that make housing more affordable and create long-term wealth? “

Second, people who see things that don’t make sense should speak up.

Hsu says many of those who could have spoken before the financial crisis did not because they were making money.

Third, the industry should be able to explain how it makes a profit – or not.

“How is money made and lost in crypto / DeFI?” Said Hsu. “For the industry to grow responsibly, there has to be a simple way to answer this question. It can’t be covered in jargon if it’s about building confidence and confidence over time. ”

More comes beyond those strong words, clearly. In a previous speech, Hsu noted that a presidential task force, comprising banking regulators, the Treasury Department, the Commodity Futures Trading Commission, and the SEC, was due to release a document on stablecoins in the fall of 2021.

“Innovation is important,” Hsu said in the speech, “but maintaining trust is paramount. “

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