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

In his opinion, that may mean that cryptocurrencies are forced to comply with current regulatory standards. Alternatively, regulation should be adjusted to cryptocurrencies, recognizing new possibilities.

In the early 2000s, regulators tried to protect the banking system from structured finance and shadow banking by pushing it outside the perimeter. That is a mistake they do not want to repeat.

However, since there are numerous regulators with different regulatory perimeters, fintechs can select one or the other. In Hsu’s opinion, this could lead to the winner’s curse. “The line between well-adapted regulation and unduly accommodative regulation can be blurred,” Hsu said.

“Attracting licensees and crypto activities may be a sign that a regulator may have accommodated the industry too much.” He did not mention any regulator in particular. But it is hard to miss that the crypto industry strongly prefers the CFTC over the SEC.

He discussed the OCC Interpretive Letter issued in November 2021 that requires domestic banks to first apply for a supervisory no-objection letter before undertaking crypto activities. Although the Federal Reserve introduced a similar requirement in August, Hsu and the OCC were ahead of the game.

With banks turning to the OCC regarding their digital asset activities, the regulator has a clearer view of where supervisors need to take action in the short term.

The first is to manage the liquidity risk of deposits from crypto asset companies, including stablecoin issuers. We assume you are referring to the risk of quickly withdrawing substantial deposits.

The other two areas are cryptocurrency trade facilitation and cryptocurrency custody. Inter-agency efforts appear to be advanced on the first two, but surprisingly, not on custody.

He warned that the crypto industry might want to wait until they read the fine print on these points. And he hinted at the OCC’s approach.

With regard to safeguarding the banking system and protecting customers, “railings and gates can help achieve this,” Hsu said. “The more novel and risky an activity, the more stringent a bank’s limits and controls need to be to meet supervisory expectations. The opposite also is true”.