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

  • Fragmentation and hacks: With the daily addition of new blockchains, the crypto ecosystem has become increasingly fragmented, which presents interoperability issues. Cross-chain bridges, although they provide a solution to these problems, are very susceptible to hacking.

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

  • Rights of custody and property: The lack of clear standards for ownership and custody of digital assets puts consumers at risk and is underdeveloped given the size, scope and ambitions of the industry. For example, America’s largest centralized exchange recently revealed that its users would risk becoming unsecured creditors if the exchange were to file for bankruptcy.

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

put into practice: Admittedly, a “crypto-skeptic”, this isn’t the first time that Hsu has expressed concern about the industry. He also reiterated his previous risk warnings in the crypto space when speaking to the Blockchain Association last year (which we blogged about here). Nonetheless, Hsu also remarked that he “came to see his potential and understand[s] why there is excitement around this.” While this may signal the OCC’s willingness to consider other permitted cryptocurrency activities for banks in the future, Hsu’s recent remarks are clear that the OCC is continuing with a cautious and prudent approach to crypto and will hold the banks to the same.

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