The Biden Administration’s Executive Order for digital assets observed that one in six adult Americans are involved with cryptocurrency, while other surveys place this figure closer to one in three. At the same time, a solid majority of Americans indicate they’d prefer to conduct crypto dealings through their financial institution.
This seems like a dream scenario for banks and credit unions looking for opportunities to deepen client relationships and pursue new sources of fee income to replace the overdraft/NSF revenue and interchange that is increasingly under threat.
So why haven’t more FIs seized on this opportunity? Concern over an unclear regulatory landscape is a commonly cited reason. We believe such misgivings are overblown and that the structures are in place to manage the compliance challenges that may accompany an initial, limited-scope crypto rollout.
Positive Signals from Regulators
In December, the National Credit Union Administration (NCUA) issued a letter clarifying federally insured credit unions’ authority to provide digital asset services through third-party relationships.
Two key quotes in the letter stand out. First, the NCUA referred to “already existing authority,” indicating that credit unions already had permission to forge relationships. Second, the inclusion of the phrase “does not prohibit” is also telling, indicative of something just shy of a full-throated endorsement.
The OCC issued a similar letter a month earlier, providing guidance for nationally chartered banks. Its phrase of choice was “legally permissible,” adding that a bank must ensure “it has controls in place to conduct the activity in a safe and sound manner.”
The agencies stipulated that these services must be offered through third parties, like certain other existing FI products, and require clear disclosure that crypto assets are not insured, among other terms and conditions. The NCUA letter makes the point that compliance with state licensing authorities must be confirmed. Despite these qualifiers, the letters eliminated several perceived roadblocks to providing crypto services and solutions.
Choosing Partners, Setting Boundaries
SRM’s recent report outlines several areas where banks and credit unions can provide crypto services, with varying levels of involvement and complexity. An array of service providers – a healthy mix of newcomers and well-known industry names – stand ready with solutions to support such products. Several core and mobile/online banking providers have built integrations with FI-focused crypto firms, further simplifying implementation.
As the NCUA and OCC made clear, crypto offerings must be clearly delineated from core banking services and provided through a third party. This is consistent with existing models through which banks already offer investment and other services.
Collaboration between companies well-versed in serving FIs and those steeped in the nuances of crypto should prove a valuable combination, though banks and credit unions will need to develop in-house compliance capabilities for crypto. This becomes a far less daunting task when the assets reside off the FI’s books, and experienced partners can offer assistance and education – especially when they have significant stakes in a project’s success.
The Bottom Line
Early signs from regulators have eased the path for many banks and credit unions to offer an in-demand service by affirming an FI’s authority to offer digital asset services through third parties. Multiple vendors with whom FIs already work provide crypto support and integrations.
These firms understand the needs of banks and credit unions, and they know the intricacies associated with FIs venturing into unfamiliar waters. With crypto activities staying off balance sheets and a growing number of early adopter FIs serving as examples, the path seems clear for limited-scale exploration of crypto service offerings.