Comptroller of the Currency Michael Hsu says regulation is too fragmented when it comes to fintech and crypto firms



Acting Controller of Currency Michael hsu delivered a compelling speech today during a presentation at the American Fintech Council, FinTech Policy Summit. AFC largely represents digital and neo-banks as well as non-bank lenders.

Hsu recently spoke at a Blockchain Association event where he slammed the crypto like “fool’s gold. “Today’s presentation took a very different approach by commenting on the importance of regulation and the highly fragmented regulatory environment that crypto firms, neobanks (synthetic banks), and digital banks must navigate.

Hsu criticized fintechs that “lie outside the so-called banking regulatory perimeter”, an understandable opinion:

“In the cryptocurrency space, the rapid growth in the number of users and total market value has only been matched by the growth in scams and consumer complaints. “Go fast and break things” is a common mantra in tech. In the context of financial services, it is important to remember that these “things” are people and their money. “

Regarding “synthetic banksOr SBP – as he calls these companies, Hsu said these companies “take deposits, make loans and facilitate payments” which are digitally reassembled without adhering to the necessary regulatory oversight.

These companies, like crypto firms, claim to be regulated, but these are “half-truths”, according to Hsu, because they are “partially” or “selectively” regulated.

But instead of only pointing fingers at FinTechs, Hsu says there is a broader regulatory loophole because there is no “global and consolidated supervision. “

“… No single regulator can see the big picture and understand how a business as a whole operates and takes risks. This deserves more attention as crypto companies, especially universals, grow, engage in a wider range of activities and risk-taking, and deepen their interconnection within the crypto ecosystem and with traditional finance.

The solution is one that many FinTechs will adopt. In fact, many aspire to a harmonized approach to compliance and regulation. Today, many U.S. fintechs must comply with both state and federal regulations, with federal oversight coming from an alphabet soup of offices, commissions, and departments – a process that can crush even the most determined fintech entrepreneur. .

Acting Controller Hsu explains:

“… We need to ‘upgrade’ banking and finance. I use “higher level” in both senses of the word, ie to increase something in order to remove a mismatch and move to the next level. We need to eliminate the disparity between the rights and obligations of banks and the rights and obligations of synthetic banking providers by keeping SBPs up to banking standards. At the same time, we need banks, fintechs and crypto companies to step up and make the management of other people’s money a very high trust business, where the needs of all customers are reliably met. and always safe, healthy, and fair. By leveling up, we can maintain confidence in money, loans and payments, and assure the public that financial innovation and change do not harm consumers or endanger the financial system. “

Hsu was quick to point out that he was NOT defending traditional banking – a finance industry that has been slow to change and improve. Banks must also “take it to the next level” and competition from fintechs must be accepted while adhering to a strong and clear compliance regime.

Currently, there is no single federal agency responsible or dedicated to the supervision of banks or Fintechs. This must change.

“It requires a change in the way regulatory agencies, including state regulators, interact and in the way we define success. It requires less regulatory competition and more cooperation, less parochialism and more teamwork, and less autonomous independence and more interdependence. It forces us not to hang on or withdraw into the past, but to accept and adapt to the future. Simply put, we regulators also need to take it to the next level. “

Neobanks, unlike chartered digital banks (and there are only a few), have been intimidated by the regulatory ecosystem. Regulatory fragmentation can “obscure excessive risk-taking” because one agency may exercise oversight over one operational aspect, but another may regulate a different function. Siled responsibilities create ineffective regulation and inevitably overlap, generating unnecessary cost that is ultimately borne by consumers and businesses. A regulatory tax and hidden rules.

Mentioning Binance and Attached by name, Hsu distills what is really needed:

“To build long-term trust with the public and avoid BCCI / AIG-type events in the future, large universal crypto companies – especially high-circulation stablecoins issuers – should adopt comprehensive and consolidated supervision. . At the same time, regulators of federal and state banks should prioritize developing policies, personnel, and supervisory approaches to bring these businesses safely within the regulatory perimeter of banks. This would clearly differentiate safe and healthy crypto firms from those that are only partially regulated and have a history of supervisory failures, such as Binance and Tether. “

The key is consolidated supervision which hopefully streamlines, but maintains a rigorous regulatory process.

Although Hsu is there, the chances of policymakers continuing down this path are low to zero. Especially in the highly politicized environment which is exemplified by a divided Congress battling a massive social spending bill that could completely change the makeup of the country. Additionally, Hsu is most likely a temporary voice of reason, as the Biden administration, reluctant to support fintech innovation, has selected another person to head the Office of the Comptroller of the Currency.

The speech can be downloaded here.


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