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Acting OCC Comptroller Identifies Financial Crisis Lessons For The Crypto Industry – Technology

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Acting OCC Comptroller Identifies Financial Crisis Lessons For The Crypto Industry

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In remarks before the Blockchain Association, Acting OCC
Comptroller Michael Hsu identified lessons from the 2008
financial crisis that regulators and the crypto industry should
apply to “avoid repeating the mistakes of the past.”

Mr. Hsu warned of similarities between the trajectory of (i) the
crypto and decentralized finance (“DeFi”) industries and
(ii) the derivatives business leading up to the 2008 financial
crisis. He drew a distinction between innovation used to solve a
problem and “innovation for innovation’s sake,”
explaining that the latter lacks a clear purpose. Mr. Hsu likened
the proliferation of synthetic collateralized debt
obligation-squared deals and negative amortization mortgages to the
creation of stablecoin savings accounts, asserting that these
products lack straightforward explanations as to their function and
how returns are generated. Mr. Hsu stated that most crypto/DeFi
innovations do not appear to be addressing issues in the real

Mr. Hsu also pointed out that the percentage of the underbanked
who own a cryptocurrency is higher than the percentage of the fully
banked. Citing these statistics, he raised concerns that a crypto
or DeFi financial crisis would impact the individuals who are least
likely to endure it.

Mr. Hsu also cautioned that the crypto/DeFi industry’s
ability to withstand previous destabilizing events is not an
indication that the industry will withstand future events as crypto
markets open up more and more to mainstream investors rather than
just “hardcore believers.”

Noting the similarities between the innovation leading up to the
2008 financial crisis and the rapid developments in the crypto/DeFi
space, Mr. Hsu recommended that regulators and the crypto/DeFi

  • root financial innovation in a clear purpose to ensure that its
    advent is actually helping to solve an issue, such as reducing the
    expenses associated with poverty and improving access to credit,
    banking services and affordable housing;

  • advocate for and address scrutiny of crypto innovations to
    ensure that they better serve the public and are more sustainable;

  • ensure that the profit and loss mechanisms of a crypto
    innovation can be explained without jargon.


OCC Comptroller Hsu’s speech leaves little doubt as to
his skepticism of crypto/DeFi markets. His comparison of current
crypto/DeFi innovations as similar to the credit default swaps
that, in significant part, precipitated the 2008 global financial
crisis, will not go unnoticed by market participants and financial
regulators. Beyond tone, the content of Comptroller Hsu’s
speech is largely consistent with his 
previous remarks
 expressing caution on technological
innovations outside of the traditional banking system.

The speech raises a number of interesting questions as to the
“purpose” of financial innovation, to use
Comptroller Hsu’s terms. For example, if financial
innovation should be “anchored in purpose,” as he
posits, what should that purpose be? Who or what should
determine such purpose or evaluate whether that purpose is
appropriate or satisfactory? Isn’t one of the fundamental
purposes of any business, crypto or otherwise, to satisfy consumer
demand? Should such decisions be left to financial regulators or to
the market itself? 

Further, Comptroller Hsu argues that all financial
innovation can be subject to “perversion” at one point or
another. However, his remarks are silent as to how to determine and
prevent such “perversions” in innovation. He criticizes
innovations in crypto/DeFi markets as inappropriately “focused
on enhancing trading” rather than providing “solutions to
problems in the real economy.” Yet, are all innovations that
are focused on enhancing trading necessarily
perversions?  What role do financial regulators have in
mitigating or managing such “perversions”? 

While these questions do not have any obvious answers,
they should be considered, particularly as crypto/DeFi
markets continue to develop and move into banking sector activities.

Cadwalader’s Steven Lofchie contributed to this

Primary Sources

  1. OCC Speech, Michael Hsu: Cryptocurrencies,
    Decentralized Finance, and Key Lessons from the 2008 Financial

  2. OCC Press Release: Acting Comptroller Discusses
    Innovation in Digital Assets

The content of this article is intended to provide a general
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about your specific circumstances.

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Updated 09.16.2021: Digital Asset SEC Timeline

Perkins Coie LLP

The Digital Asset SEC Timeline serves as an interactive compilation of select SEC guidance, enforcement actions, and speeches relating to the application of the federal securities laws to digital assets.

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Oliver Bolt

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