On December 8, the United States Office of the Comptroller of the Currency (OCC) commented on the regulation of crypto and crypto firms in its report. The OCC is an independent bureau of the U.S. Department of the Treasury. It charters, regulates, and supervises all national banks, federal savings associations, as well as federal branches and agencies of foreign banks.
The financial regulator has warned banks about the “emerging risks” in the cryptocurrency sector. The regulator also said that the sector should maintain a “cautious approach” and seek permission when engaging with crypto or crypto firms in relevant cases.
Its report titled Semiannual Risk Perspective for Fall 2022 has highlighted “several key risks” of the crypto sector, citing various “dislocations” existing in the market over the past year.
The report highlights three major concerns of the regulator around the instability of the stablecoins, the absence of an efficient risk management mechanism, and the high risk of contagion. It quoted the concerns: “stablecoins may be unstable, the crypto industry lacks mature risk management practices, and has a risk of contagion due to the high degree of interconnectedness.”
As per the OCC, the questions regarding financial stability have been raised majorly by the sector’s lack of “consistent or comprehensive regulation” and the volatility of digital assets along with the rising number of firms offering “bank-like products and services” using Crypto and other tokenized assets.
The report also added the example of the depeg and the collapse of TerraClassicUSD (USTC), an algorithmic stablecoin that occurred in May, to illustrate its point. It highlighted the example of stablecoins’ “run risk” and how asset-backed stablecoins also witnessed minor depeg events resulting from the same.
It said that the stablecoin backings have “incrementally evolved” since but believes that it “remains most susceptible to run a risk.”
Further discussing risk management, the regulator commented that the practices at crypto firms were maturing; however, they are yet solid or robust. The firms have appeared to be “unprepared for the stresses and surprises” over the past year that saw losses of millions of investors.
The report also highlighted the increasing activities by malicious actors threatening the investors and their practices. It said that hacks and scams have become more frequent, and some cases regarding ownership, custody, etc., have much less clarity and immense confusion.
“Hacks and outages are frequent, and fraud and scams remain high throughout the industry. In some cases, ownership rights, custody arrangements, and financial representations have created a high degree of confusion.”
OCC’s report also revealed the “interconnectedness” of the crypto market this year through a “variety of opaque lending and investing arrangements.” It also added the speculation that the industry participants might be engaging in “highly leveraged trading,” resulting in the noted contagion risk.
Advising banks, the regulator has said that banks should have an incremental or careful approach when dealing with Crypto or firms related to Crypto. The national banks must discuss all crypto-associated plans with the supervisory before implementing them. The banks must be open in discussing their engagement in crypto-activities, considering that some require authoritarian permissions.
Many crypto firms have moved to enhance their transparency due to the wide-scale bankruptcy of crypto firms following the collapse of FTX. Some firms have also introduced proof-of-reserves allowing users to verify crypto backings along with conducting or planning to conduct regular public third-party audits.
OCC has always maintained a balanced approach towards crypto, neither advocating nor criticizing. Earlier this year, it condemned the regulators’ over-attention to the sector and launched a program to help fintech startups.