Are Crypto and DeFi Threats to the Global Financial System?

The U.S. agency that had once been the great hope of the cryptocurrency world is now issuing strong warnings to the industry that it’s in danger of echoing the toxic culture before the 2008 financial crisis.

Michael Hsu, the acting chief of the Office of the Comptroller of the Currency (OCC), argued Tuesday that cryptocurrencies and decentralized finance (DeFi) may be evolving into threats to the financial system in much the same way certain derivatives brought it near collapse more than a decade ago. Notorious credit default swaps (CDSs) were engineered by math wizards in much the same way that crypto has emerged, he said.

“Crypto/DeFi today is on a path that looks similar to CDS in the early 2000s,” Hsu told the Blockchain Association in a webcast. “Fortunately, this group has the power to change paths and avoid a crisis.”

The OCC was previously run by a former Coinbase Global Inc. executive, Brian P. Brooks, who led a pro-crypto charge to establish policies more welcoming to the industry and to provide some of the firm’s banking charters. When he was installed at the OCC by Treasury Secretary Janet Yellen, Hsu put its crypto-friendly policies on hold and has been among regulators calling for a new, unified approach across agencies.

Among his comments today:

• Adopting a skeptical tone similar to Securities and Exchange Commission (SEC) Chairman Gary Gensler’s, Hsu said he is troubled by the industry’s high-yield savings products and asked, “How are the returns generated? It is hard to get straight answers that don’t quickly devolve into cryptospeak.”
• “Crypto/DeFi solutions to problems in the real economy are rare,” Hsu said.
• He also said a reckoning could be on the way in which the “hard-core believers in the technology” give way to mainstream users who aren’t as eager to forgive the riskiness of the products. Those people will “dominate and drive reactions,” which he suggested could mean more danger of panics that unravel crypto investments and threaten firms that run into trouble.
• Hsu has been involved in talks at the President’s Working Group on Financial Markets about what the government should do about stablecoins—a key segment of digital currencies, including the popular Tether token.

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