OCC Chief says Crypto Could Destabilize the Financial System Like Derivatives in 2008

Michael Hsu, Chief of the US Office of the Comptroller of the Currency (OCC), isn’t very keen on cryptocurrency. He recently called the industry a threat to the financial system that could unravel into a 2008-style collapse.

Hsu’s Concerns Surrounding Crypto

Hsu voiced his criticisms of the digital asset space in a webcast with The Blockchain Association on Tuesday. During the call, he compares the threat of cryptocurrencies to credit-default swaps that led to the banking meltdown of 2008. Like cryptocurrency and DeFi models, he says that the math wizards engineered them to make risky lending foolproof.

Crypto/DeFi today is on a path that looks similar to CDS in the early 2000s. Fortunately, this group has the power to change ways and avoid a crisis.

Credit default swaps are a form of insurance lenders use against the risk of borrowers defaulting on their loans. Lenders purchase credit default swaps from a third party that guarantees to reimburse them if their borrower defaults. This typically comes in exchange for a monthly premium paid by the borrower to the third party. 

More specifically, Hsu says he has concerns over the high yield earning rates that many crypto institutions offer customers. He claims that explanations of how these industries generate such massive returns tend to “devolve into cryptospeak.”

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Overall, the OCC chief does not believe that crypto and DeFi offer much in the way of real-world economic solutions. Therefore, their value is highly speculative and quite likely to lead to destructive boom and bust cycles. 

Extra Cautious Regulators in the US

The OCC has been more critical of crypto since Michael Hsu assumed his role as chief. Previously, a former executive of the cryptocurrency exchange Coinbase managed the regulatory body. Naturally, he was more welcoming to the industry, providing banking charters to some emerging crypto firms. 

A similar story regards the SEC. The commission was once led by Jay Clayton, who has since joined an Israeli-based cryptocurrency custodian out of excitement for the industry’s prospects. However, Gary Gensler was recently interviewed by the Washington Post, saying he believes most cryptocurrencies are securities. As such, he believes that regulatory oversight should preside over most tokens trades.

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As of late, both Hsu and Gensler have been researching and discussing how to address stable coins, including Tether.