On May 24, the acting Comptroller of the Currency, Michael Hsu remarked at the DC Blockchain Summit 2022 about his observations on the “deep” vulnerabilities of cryptocurrency in light of the recent market volatility and other events in the crypto economy.  Hsu emphasized three vulnerabilities in particular:

• Fragmentation and hacks: With new blockchains being added daily, the crypto ecosystem has become increasingly fragmented, which presents interoperability issues. Cross-chain bridges, although providing a solution to these issues, are highly prone to being hacked.

• Contagion risks: The highly interconnectedness of the crypto ecosystem presents real contagion risks. As evidenced by the recent collapse of a popular algorithmic stablecoin, which caused another stablecoin to drop in value.

• Custody and ownership rights: The lack of clear standards for the ownership and custody of digital assets puts consumers at risk, and is underdeveloped given the size, scope, and ambitions of the industry. For example, the largest U.S. centralized exchange recently disclosed that its users would be at risk of becoming unsecured creditors if the exchange were to file for bankruptcy.

Hsu also observed that despite the volatility and loss of market capitalization after the recent stablecoin collapse, there has been no stress to traditional banking and finance due to crypto exposure, a result which he attributes, at least in part, to federal bank compliance and intentional emphasis on safety, soundness, and consumer protection.  Hsu found this to be a result of the OCC’s “careful and cautious” approach to banks seeking to join the crypto economy, referenced in Interpretive Letter 1179 issued last year (we previously discussed this letter in a blog post here).

Putting It Into Practice:  Admittedly a “crypto skeptic,” this is not the first time Hsu has voiced concern with the industry.  He also recalled his previous warnings of risks in the crypto space in speaking to the Blockchain Association last year (which we blogged about here).  Nonetheless, Hsu also remarked that he has “come to see its potential and understand[s] why there is excitement around it.”  Although this may signal the OCC’s willingness to consider other permissible cryptocurrency activities for banks in the future, Hsu’s recent remarks are clear that the OCC continues with a careful and cautious approach to crypto and will hold banks to the same.