OCC chief likens DeFi to credit default swaps in 2000s, warns of crash

Acting US Comptroller of the Currency Michael Hsu reckons underbanked minorities are most exposed to a potential DeFi crash.

Acting US Comptroller of the Currency Michael Hsu believes decentralized finance (DeFi) must learn from mistakes made in the 2008 market crash.

In a Tuesday speech, the chief banking watchdog told The Blockchain Association (TBA) that underbanked minorities are exposed to the most risk should crypto markets experience a sudden DeFi downturn.

Hsu speaks from experience, having witnessed the 2008 market crash firsthand from his role as an economist at the US Securities and Exchange Commission.

Likening Wall Street at the turn of the millenium to a fool’s gold rush, Hsu warned a DeFi crash could happen for similar reasons.

“I have seen one fool’s gold rush from up close in the lead up to the 2008 financial crisis. It feels like we may be on the cusp of another with cryptocurrencies and [DeFi],” Hsu warned.

“Crypto and DeFi today are on a path that looks similar to [credit default swaps] in the early 2000s. Fortunately, this group has the power to change paths and avoid a crisis,” he added.

Hsu went further. He said he finds it “concerning and ironic” that crypto and DeFi is “replete with scams.”

And rather than facilitating cash-type transactions, most of the innovations in the ecosystem are focused on enhancing trading, he reasoned.

Hsu then cited two recent polls that quizzed the US population on whether they own cryptocurrency.

  • 10% of fully-banked respondents answered yes,
  • 12% of the unbanked did too,
  • while a whopping 37% of the underbanked held crypto.

“A Harris poll several weeks later asked the same question, with answers publicized by race: 13% of whites, 18% of African Americans, and 20% of Hispanics reportedly own crypto,” said Hsu.

“To the extent there is fool’s gold in the crypto space, some of those who are going to be hurt most are going to be those least able to bear it.”

Hsu reckons stablecoins could trigger DeFi crash

Appointed by Treasury Secretary Janet Yellen in May, Hsu’s attitudes towards crypto differ markedly from predecessor Brian Brooks.

Under Brooks, the OCC endorsed Anchorage as the first federally-chartered crypto bank. After leaving public office, Brooks briefly served as chief exec of Binance US, the crypto exchange’s US-regulated subsidiary.

Hsu took the top role at the Office of the Comptroller of the Currency (OCC) in the spring. He’s since ordered a review of the previous administration’s pro-crypto policies.

The new OCC chief singled out stablecoin lending and staking for potentially leading to a DeFi crash.

The DeFi market has grown by nearly 7,500% in the past three years, from $1.8 billion to nearly $135 billion.

“How are the returns generated? It is hard to get straight answers that don’t quickly devolve into cryptospeak. If one follows the money, what lies at the end,” Hsu told TBA.

Hardcore crypto investors have the stomach to remain in the market following a hack or a rug pull, but Hsu believes the mainstream market might lose faith in DeFi ecosystems.

“A run on a large stablecoin could be highly destabilizing. Stablecoins are not the only potential trigger, however.”

“Forks, hacks, rug pulls, vampire attacks, and flash loans all have the potential to surprise, erode trust, and spark fear,” said Hsu.

SEC chair also suspicious of stablecoins

Biden’s SEC chair Gary Gensler also took shots at stablecoins in a recent interview with The Washington Post.

“These stablecoins are acting almost like poker chips at the casino right now,” remarked Gensler.

Dollar-pegged stablecoins like Tether (USDT) or Circle’s USDC purport to be backed one-to-one by a basket of assets (mostly commercial paper and other securities).

[Read more: Canada’s largest markets watchdog banned Tether — is USDT a security?]

Gensler’s SEC recently put pressure on crypto exchange Coinbase about its plans to offer interest-bearing crypto accounts that support stablecoins.

The top exchange in the US scrapped the project shortly after receiving a Wells Notice, which detailed the SEC’s intention to sue.

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