April 27, 2022
My guest today is Michael Hsu, the Acting Comptroller of the Currency, and we are talking all things– and only things – crypto.
Financial regulators everywhere have escalated this issue in 2022, as the volumes of activity and flows of capital in crypto markets have skyrocketed. Until recently, US regulators have tended to emphasize crypto’s risks, but that framing shifted in March when President Biden issued an executive order on the topic. It calls on multiple agencies to develop strategies that will aim for a balance, seeking to reap the potential benefits of this new technology while also minimizing its dangers. More and more agencies and officials are weighing in.
As part of that dialogue, the conversation in this episode really stands out. The Acting Comptroller shares reflections that reach down deeply, parsing these challenges in all their novelty, complexity and nuance. He doesn’t claim to have figured it all out, but in my view, he has figured out a great deal about how to approach the decisions ahead. Starting with the values that should underpin policy, he talks us through what are goals should be, how crypto is and is not similar to earlier kinds of financial innovation, the tradeoffs we will have to choose among, the types of regulatory strategies available, and even how to ponder some of the philosophical questions arising in this new financial terrain. Acting Comptroller Hsu is known for his intense intellectual curiosity, and it shows.
One key insight is his focus on stablecoins. He views them as the foundation layer of the whole crypto system and argues that if we regulate them wisely, the rest is likely to work. He cites the three core questions that need answers: how stable should they be; how fungible should they be; and how separable should they be from the banking system? He also cites the two basic models we could use for regulating them, along with the “knobs and dials” available for fine-tuning. Another helpful insight is his argument that we’ll need to figure out both the macro and the micro issues at the same time – “zooming in and zooming out simultaneously” – if we’re going to get it right.
Another key issue is financial inclusion. Crypto investors are disproportionately young, lower income, and people of color – that is, they come from groups that have often not felt well-served by traditional finance. I think this fact has given pause to many people who jumped to the assumption that crypto is bad for consumers. But, how real is the chance that crypto could open doors for more people to build wealth? And how can they be protected from the tremendous risks in this sector? The Acting Comptroller reminds us that April is Financial Literacy Month, and we know that not many people are literate in crypto. For example, he points out that blockchains reduce costs by removing intermediaries, but in the process may also remove recourse – which consumers are not accustomed to. How much regulatory protection should they have?
Our conversation covers a lot of other ground: the lack of interoperability among today’s stablecoins; whether and how stablecoin issuers should have bank charters; problems with blockchain technologies; the evolution of Central Bank Digital Currencies; the role of the US dollar as the world’s reserve currency; whether US regulation could undermine America’s international competitiveness; the unique challenges posed by regulating DAOs (since they are basically just a set of rules); potential lessons from the birth of the internet; and the blockchain “trilemma” cited by Vitalik Buterin forcing prioritized choices between decentralization, security and scalability. He also ponders the human factor, as people feel a sense of “community” in decentralized finance, while also embracing a world that promises to monetize, and transact around, nearly every aspect of their lives.
We talked about the challenge arising from the sheer pace and novelty of all this change. Acting Comptroller Hsu challenges the stereotype that financial regulators are “stodgy” and living in the past – and I would say the interview is exhibit A in making his point. At the same time, we hear in this conversation the voice of the seasoned financial regulator who knows things can go wrong, because they have. He makes a critical point that I think needs to animate all the work ahead, which is that now is the time to get the architecture right, and that this needs to done with the right people at the table – the innovators and commercial interests, yes, and also people whose role is to represent the public interest. They need to work together. If we could turn back the clock and design the internet with the benefit of what we know today, we probably would have done some things differently. Maybe we will actually get to do that, in Web3.
The Office of the Comptroller of the Currency is America’s oldest federal financial regulator. Its arcane-sounding name arises from the fact that it was established during the US Civil War to, literally, get control over the currency at a chaotic time when money consisted of privately-issued bank notes. I myself was a Deputy Comptroller of the Currency years ago. As crypto comes of age, it is raising some similar challenges. I know you will enjoy hearing Acting Comptroller Hsu’s thoughts on how best to meet them.
Mr. Hsu became Acting Comptroller of the Currency on May 10, 2021, upon his designation as First Deputy Comptroller by Secretary of the Treasury Janet Yellen pursuant to her authority under 12 USC 4.
As Acting Comptroller of the Currency, Mr. Hsu is the administrator of the federal banking system and chief executive officer of the Office of the Comptroller of the Currency (OCC). The OCC ensures that the federal banking system operates in a safe and sound manner, provides fair access to financial services, treats customers fairly, and complies with applicable laws and regulations. It supervises nearly 1,200 national banks, federal savings associations, and federal branches and agencies of foreign banks that serve consumers, businesses, and communities across the United States. These institutions, which conduct approximately 70 percent of banking activity in the country, range from community banks serving local neighborhoods to the nation’s largest most internationally active banks.
The Comptroller also serves as a Director of the Federal Deposit Insurance Corporation and a member of the Financial Stability Oversight Council and the Federal Financial Institutions Examination Council.
Prior to joining the OCC, Mr. Hsu served as an Associate Director in the Division of Supervision and Regulation at the Federal Reserve Board of Governors. In that role, he chaired the Large Institution Supervision Coordinating Committee Operating Committee, which has responsibility for supervising the global systemically important banking companies operating in the United States. He co-chaired the Federal Reserve’s Systemic Risk Integration Forum, served as a member of the Basel Committee Risk and Vulnerabilities Group, and co-sponsored forums promoting interagency coordination with foreign and domestic financial regulatory agencies.
His career has included serving as a Financial Sector Expert at the International Monetary Fund, Financial Economist at the U.S. Department of the Treasury helping to establish the Troubled Assets Relief Program, and Financial Economist at the Securities and Exchange Commission overseeing the largest securities firms.
Mr. Hsu began his career in 2002 as a staff attorney in the Federal Reserve Board’s Legal Division. He holds a bachelor of arts from Brown University, a master of science in finance from George Washington University, and juris doctor degree from New York University School of Law.
I hope you are loving the shows of 2022 thus far, and we have more great ones coming up! We have Kosta Peric, Deputy Director of Financial Services for the Poor with the Bill & Melinda Gates Foundation; Deborah Young, CEO of the Regtech Association, based in Australia and global in scope; Queen Maxima of the Netherlands; Sigal Mandelker, former Treasury official and now at Ribbit Capital; Nicole Elam and Robert James of the National Bankers Association; returning guest Jeremy Allaire, CEO of Circle, with Tomicah Tillemann, speaking with us about Web 3; and Sunayna Tuteja, the first ever chief innovation officer of the Federal Reserve System – among others!!
There are also many exciting conferences coming up. Join David on Thursday, April 28 at the Treasury Minority Bank Summit. Then, join me at this year’s Shared Assessments Third Party Risk Summit, at LendIt Fintech and the ABA Regulatory Compliance Conference. For those of you in or near Zurich, I hope to see you in June at the Point Zero Forum, a unique gathering hosted by the Swiss government and Elevandi, a nonprofit entity created by the Monetary Authority of Singapore (MAS) (I serve on Elevandi’s board.)
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