This Week in AML

Latest Views of the OCC on Cryptocurrency

Acting Comptroller of the Currency Michael Hsu recently spoke at the DC Blockchain Summit 2022 about the state of the virtual currency space. In his remarks he highlighted several areas of concern, in particular – the vulnerability of crypto hacks, the risk of loss contagion, and the need for clarity about the ownership of crypto assets. John and Elliot discuss each of these topics, and why members of the financial crime prevention community need to continue to grow their understanding of virtual currencies and assets and the risks they present.



Latest Views of the OCC on Cryptocurrency TRANSCRIPT


Elliot Berman: John. How are you today?

John Byrne: Hey, Elliot. How's it going?

Elliot Berman: Good. Good, it's a beautiful day here. And we've had a run of nice weather here in the Midwest. So that's a good thing. In late spring and early summer.

John Byrne: So we're full summer here. It's already sitting. Yeah. 95 degrees. It's DC. What are you gonna do?

Elliot Berman: Yeah, exactly. Right. So you're running earlier in the morning too?

John Byrne: Oh, yes, yes, yes. That's a must. You can't go running at noon around here. Unless, well, we'll leave it at that.

Elliot Berman: Right. So recently, the acting Comptroller of the Currency, Michael Hsu, gave a speech at the DC Blockchain Summit.

And he titled it "Crypto a Call to Reset and Recalibrate." Did you happen to see the transcript of those remarks?

John Byrne: Yeah, I did. And I think one thing that we constantly struggle with in the AML community is trying to figure out, as we did years ago with money service businesses, where, you know, currency exchangers, our crypto exchangers, and other sorts fit into our world.

And while this is broader than that, his comments are obviously much broader than that. There have been so many stories in the main press on crypto, and obviously, in trade papers and that sort of thing, that anytime a regulator speaks, I think it's pretty important. Right? So when I saw those remarks, I noticed a couple of things.

Number one, obviously, the fact that regulators speak at things like a blockchain summit is pretty important. So obviously there, of course, they're serious about understanding and oversight and all that, but also it shows that they are both doing their homework. Figure out where things fit, and I'm looking at his comments. He didn't shy away from the fact; he said it right up front. He says I'm a crypto skeptic. He didn't say he's against it. He said I'm a skeptic. And he thought that it was important to sort of identify some of the things that happened recently and where that fits within his worldview, if you will, on cryptocurrency.

Elliot Berman: Yes, agreed. And you and I talked about this before we started recording. I think it's okay.

I'm more comfortable with, at least in the US, the federal bank regulators and other places around the world for the regulators to take a cautious approach to integrating crypto and other virtual currencies into the overall financial markets to ensure safety and soundness.

That's certainly a primary issue in the US primary regulatory requirement or obligation and stability in the financial markets because these are new things. They have their own challenges, as we've seen recently in the vault, in the most recent volatility cycle, and in some of the things that acting controller Hsu speaks about. These include the fact that the marketplace for crypto is very fragmented, which has made it more susceptible to being hacked. Secondly that there's a contagion component to some of these things. You talked about the TerraUSD, a stable coin that collapsed, sparking contagion to the largest stable coin, Tether, and the broader ecosystem.

Then he talked about the fact that custody and ownership rights are underdeveloped for the industry's size, scope, and ambitions. That's a quote from his bullet points. And in there, he talks about the fact that one of the largest centralized exchanges in the United States disclosed as

TerraUSD was collapsing, and if a bankruptcy was filed, the exchange users could be at risk of becoming unsecured creditors, right? For those of our listeners who aren't familiar with that term, they only have a claim on the company's general assets, not on any specific assets.

So it's not as if, you know, like at a bond shop where you're holding a bond in my name, if the bond shop collapses, I have a claim on my particular bond, the ownership. Crypto and virtual currencies are just not built out with that level of clarity which is another stability issue.

John Byrne: Right. And when you mentioned contagion, he makes it very clear that the fact that the OCC has had a cautious approach has been proven correct, given that there has been no contagion after Terra.

He said no banks were under stress or even rumored to be stressed from cryptocurrencies to traditional banking and finance because of the crypto exposure. So he argues that the OCC's oversight of traditional banks and emphasis on safety and soundness and consumer protection has, you know, withstood this and certainly stresses against the system. So I think he certainly believes that by being cautious, that's the way to understand the market, the crypto market better, and better understand where it interacts with the traditional banking system.

Elliot Berman: Right, he also spends a fair amount of time. And one of the central themes in the conversation is the fact that a lot of the growth in the value of cryptocurrencies has been driven by hype. And he zeroes in again on Terra and talks about the fact that they offered 20% returns to hold your suit deposited tokens, the anchor protocol, which was the platform that was running on.

And he describes it as this come for the yield approach is not unique to Terra. And so, if you think about other financial crises we've had in the past, in the US, sometimes, you know, a disconnect between the fundamentals of finance and economics and how the marketplace was reacting have fueled those things.

And I think one of his points is that, at least at this point, there's a lot more hype than fundamental in these markets.

John Byrne: And look outside of what we're talking about in terms of the economics of all this, you know, to society on the AML CTF side, law enforcement is still very concerned about potential abuse of cryptocurrencies to move illicit funds.

They're not totally anonymous, as we know in our area. And then, a part of our AML community clarifies that there certainly are strong AML professionals hired in that space. All that's good, but I think we should pay attention to what the regulators say about this outside of our own AML backyard.

So we, we care because of understanding about the potential abuse as we do in the traditional banking space. But I also think it's important, even if we're not experts on the economics of this, to listen to people like the acting Comptroller and what Janet Yellen has said and others. Oh, what FATF is saying about this?

They're looking at this, and then there's a new executive secretary. One of the primary priorities they said in that announcement is that she will have to pay attention to virtual assets and digital issues, all of that besides everything else. So this is just part of the challenge of being an AML professional to understand this new and emerging area.

Elliot Berman: Yeah, Which makes it exciting and a little bit crazy, but you know, that's really what it's been like to be a community member for as long as you and I have been doing it. And, it's changing. It isn't all bad, but it can sometimes be a little mind-bending. So what do you got planned?

I know you're talking to some people and posting those things over the next weeks. What would you like to promo?

John Byrne: Yeah, so a couple of things we're going to be talking to an IRS CIA agent involved in cybersecurity. We can talk to him about some cases that he's worked on.

That'll be next week, and our game plan is to sit down with the world expert, I can say without being hyperbolic on asset forfeiture, Steph Casella, who will talk to us about how assets are such an important tool for prosecutors, law enforcement and others. And just a quick aside, I'd like to mention that a colleague of ours from Homeland security is leaving after 28 years with that agency that's Raymond Villanueva.

He helped us greatly in putting together the AML Partnership Forum, and we'll stay connected. But Ray is leaving Homeland Security. He's going to go; we don't know what his next steps are, but he will continue to be part of the AML community. So I wanted to shout out to Ray because of all the great work he's done and his support for the partnership.

I mean, to me, like Don Ford on our advisory board, it's just so important that we continue to move the notion of private-public partnership in the AML space. And Ray was certainly a model.

Elliot Berman: Agreed. Yes. Ray, good luck in your next endeavor or if your next endeavor is truly retirement. Good luck at that too. So all right, John, I will talk to you next week. Have a great weekend, and I'll talk to you soon. All right, Elliot,

John Byrne: stay safe.

Elliot Berman: Yep. You too. Bye. Bye.