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Terra Luna collapse reveals crypto 'driven by hype', top bank regulator says

OCC Acting Comptroller of the Currency Michael Hsu joins Yahoo Finance Live to discuss what the Terra Luna stablecoin crash reveals about the broader crypto market as well as the outlook for regulating digital assets.

Video Transcript


JENNIFER SCHONBERGER: If you're following the collapse of stablecoin, the Terra and its sister token Luna, one top regulator is warning that investing in cryptocurrencies is dangerous for investors with modest means. Acting Comptroller of the Currency Michael Hsu says hype is a serious risk for cryptocurrencies, and warns that certain activities within crypto, namely yield farming, could be akin to a Ponzi scheme. He joins me now to discuss these issues and what regulators should do now.

Comptroller Hsu, welcome back to the program. It's great to see you.

MICHAEL HSU: Thanks for having me, Jennifer.

JENNIFER SCHONBERGER: So I want to start off the conversation with your reaction to the collapse of Terra Luna. It appears they're trying to resurrect Luna, albeit not that successfully. But there are a lot of question marks about what really happened here. From your viewpoint as a regulator, what do you think caused the run? And should federal regulators be investigating this?

MICHAEL HSU: So I think the Terra Luna collapse has revealed a number of things, but I really want to focus on three. You know, the first is stablecoins are not stable. Clearly, to have an $18 billion stablecoin crashed so quickly I think showed that. Second, a lot of the growth in crypto was driven by hype, you know, part of the reason that Terra was able to grow so quickly. It was hyped and there were some very attractive yields that were not sustainable put on to it.

And third, contagion risk is real. You saw the sell off lead to both a broader sell off in the cryptocurrency market, generally, I think at half a trillion dollars of value was lost in a relatively short period of time. And you saw some pressure on another stablecoin, Tether, which is not algorithmic, and, you know, tether briefly depegged. And so I think that, that really-- I think some of these lessons just kind of reveal some fragilities in that space that everyone needs to be really careful about.

JENNIFER SCHONBERGER: Yeah. Comptroller Hsu, one of the major draws of investing in Terra was depositing it for higher returns kind of akin to that yield farming, which you've linked to a Ponzi scheme. Do you think that Terra Luna was a Ponzi scheme?

MICHAEL HSU: So there was a crypto hedge fund manager who said, "If you can't figure out where the yield is coming from, it's probably coming from future bag holders." Those are his words. And I think that is something to kind of bear in mind. There's been a lot of hype, a lot of yield, which I pointed out over a year ago to say, if you-- where are these yields coming from? You should really understand that. That's very important to protect investors, if you're investing in this space, to understand these things. And that's very important to me and to us in the regulatory community is protecting people. This is big enough now where this is an important thing that we have to pay attention to.

JENNIFER SCHONBERGER: Yeah. And I want to follow up on what you said on contagion. Obviously, there is contagion risk within crypto. We didn't see that spread this time to the traditional financial system. But if there were to be a bigger run perhaps, how worried are you about this infecting the traditional financial system and the potential for systemic risk?

MICHAEL HSU: So we have taken a careful and cautious approach to crypto. As you know and your listeners know, the OCC supervises national banks. So it's about 1,100 banks, $15 trillion in assets, and our mission is safety, soundness, and fairness. So anything that's done in the national banking system has to be safe, sound, and fair. Can crypto be done in a safe, sound, and fair way? Yes, but they have-- banks have to show us, they have to prove it.

And so we've taken this approach where, if a bank is going to do this, anything in the crypto space, they have to demonstrate to us that it's going to be safe, sound, and fair. I think that standard that we've applied has really helped to keep these issues contained within the crypto universe and to not infect the traditional banking system. And I'm proud that, you know, I did encourage the FDIC, I sit on the board there, to kind of follow in the OCC's footsteps to take that approach to banks in crypto.

JENNIFER SCHONBERGER: So is the best way to protect the banking system from risks to crypto, to limit its exposure? And if so, given what's happened, is the OCC less inclined to issue specific special bank charters for financial institutions to engage in crypto?

MICHAEL HSU: So our chartering authorities and the standards we use are going to be the same no matter what. So, you know, there's a wide range of business models for banks, and so we don't have a one size fits all in terms of that. But in terms of the standards, safety, soundness, fairness, compliance with laws and regs, protecting consumers, all of that is part of the-- what we evaluate when we look at charters, and we hold all banks to the same standards on that. So we're open-- again, we're open minded about who wants to get a charter and what they want to do with it. We're going to kick the tires on it to make sure it's safe, sound, and fair.

JENNIFER SCHONBERGER: So that's still open for you guys, just to be clear?

MICHAEL HSU: Oh, again, we're open minded on charters. Now, I think that-- to be clear, I have prioritized that I am especially sensitive to arbitrage, races to the bottom, and so I want to make sure that the way we exercise our authorities and decisions around charters don't lead to regulatory arbitrage or races to the bottom. And that's another important set of priorities for me.

JENNIFER SCHONBERGER: Comptroller Hsu, when we look at the Terra Luna crash, it seems to have elements of what occurred in the financial crisis. People were searching for high returns, they didn't read the fine print, they didn't understand what they were investing in. $40 billion has evaporated. It doesn't seem like we have the luxury of waiting for Congress to act here. Why aren't you, why aren't regulators using your current authorities to write rules now and protect investors?

MICHAEL HSU: So there are a lot of discussions taking place right now amongst the regulatory community, me and my peers. As you know, the FSOC has identified kind of the crypto world as something that-- the Financial Stability Oversight Council, of which I'm a member and others, are paying attention to. The White House put out an executive order, which require some reports about what's going on out there, what are the risks, how are we going to approach that. In the meantime, there's a lot of coordination amongst the agencies on particular areas where we can focus, and stablecoins has been one of them.

There was a president's working group report, which also included the OCC and the FDIC, which lays out some objectives, you know, making stablecoins stable, how do we do that? Ensuring that there's interoperability, you know, those are really, really important. And we're all working on those now.