Calling the cryptocurrency hype the “flywheel of growth that crypto projects seem to need to get off the ground,” the top U.S. bank regulator described the recent $45 billion collapse of the TerraUSD stablecoin as “a wake-up call and an opportunity to reset and to recalibrate” that the cryptocurrency industry must take advantage of.
See also: TerraUSD’s Price Collapse Shows Vulnerability of Dollar-Pegged Cryptos
In a Tuesday (May 24) speech, Acting Comptroller of the Currency Michael Hsu criticized what he called the industry’s “hype-based, ‘shoot, ready, aim’ approach to innovation and value creation,” saying that it crowds out productive innovation.
He was particularly critical of the yield farming that offered TerraUSD holders up to a 20% return. Calling it the primary tool of attracting investment, he said there is “growing acknowledgement that yield farming today may have more in common with Ponzi schemes than with productive innovation.”
See more: PYMNTS DeFi Series: What is Yield Farming and Liquidity Mining?
Hsu also made clear that his office will not ease off it arms-length approach to banks’ involvement with crypto, crediting his office’s pull-back from the welcoming approach of his predecessor, Brian Brooks, a former Coinbase general counsel.
Also read: Comptroller of the Currency Backpedals on Rulings Allowing Banks to Handle Crypto
Noting that it warned banks that the “engagement in crypto activities” encouraged by Brooks “is permissible only when banks have controls in place to do so in a safe and sound manner,” Hsu credited his office with the fact that no banks were “under stress or even rumored to be under stress due to crypto exposure” despite the half-trillion-dollar market capitalization collapse in the wake of the stablecoin’s rapid run to zero.
“The resilience of the traditional banking system to the recent events in crypto isn’t an accident,” he said. “Rather, it is due, at least in part, to federal bank regulators’ continued and intentional emphasis on safety and soundness and consumer protection.”
All that said, Hsu added that while he remained a “crypto-skeptic,” he has “come to see its potential and understand why there is excitement around it.”
Bipartisan View
While U.S. agencies are working on a broad crypto regulatory framework proposal due in September under President Biden’s recent executive order, Sens. Kirsten Gillibrand, D-N.Y., and Cynthia Lummis, R-Wyo., said they plan to have their own proposal ready in June.
More here: US Senators Set to Unveil Crypto Bill
The bill, which would split control between the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), will create “the type of baseline and framework legislation that will allow this industry to grow, allow it to flourish,” Gillibrand said. “The best thing we can do for all these businesses is to bring clarity.”
That said, they don’t expect a full Senate vote until next year, after the midterm elections, so the bill will likely be more of a starting point aimed at influencing the administration’s multi-agency initiative.
Meanwhile, former Ripple advisor and current Federal vice chairman nominee Michael Barr told senators that “in issues such as stablecoins there could be financial stability risks, and I think it’s quite important that Congress and regulatory agencies wrap their arms around those financial stability risks and regulate,” during a Thursday (May 19) confirmation hearing, CoinDesk reported.
Unstable in Europe
The EU also showed a get-tougher approach to crypto following the stablecoin collapse, with European Central Bank (ECB) President Christine Lagarde saying in an interview over the weekend that cryptocurrencies are “worth nothing [and] based on nothing.”
Also read: Crypto Is ‘Worth Nothing,’ Lagarde Declares, and Should Be Regulated
Warning that many crypto investors have “no understanding of the risks,” she called for stronger regulation and the passage of the EU’s pending Markets in Crypto Assets (MICA) legislation.
The ardent central bank digital currency supporter added that she would guarantee any digital euro, from day one, that “the central bank will be behind it, and I think it’s vastly different than many of those things,” Lagarde said.
That came as the ECB warned that the recent stablecoin industry problems — No. 1 stablecoin tether also lost peg very slightly and briefly, and saw investors pull $7 billion out in the wake of the terraUSD crisis — show that crypto-assets are becoming more entangled with mainstream financial markets, threatening financial stability.
See this: ECB: Crypto Could Shake Financial Stability
Meanwhile, the U.K.’s Financial Conduct Authority (FCA) “will absolutely need to take into account” the stablecoin crisis as it builds its own cryptocurrency framework this year, according to its executive director for markets, Sarah Pritchard.
She pointed to a survey late last year that showed nearly 70% of crypto investors believed they were FCA regulated, Bloomberg reported. “It shows the importance of making sure that people understand that that is a risk of where they put their money,” she said.
A New Day
Meanwhile, the Bank for International Settlements argued in a Friday (May 20) working whitepaper that crypto- and blockchain-based approaches to making cross-border payments faster and cheaper required a whole new regulatory mindset.
Read here: BIS: Cross-Border Crypto Payments Need New Regulatory Framework
As it cuts out the “mutually trusted central entities” that regulators rely upon for anti-money laundering (AML) compliance, the only effective solution would be to refocus reporting responsibilities away from individual banks, payment processors and other companies, instead requiring that these functions be built directly into the distributed ledger technology (DLT) that blockchain-based systems are built upon.
