Credit Unions and Crypto: Setting the Ground Rules

In late July, the National Credit Union Administration (NCUA) issued a request for comment on the current uses of digital assets and their potential impact on the financial system. The NCUA plans to use this input to help shape its role in safeguarding consumers and the system as these emerging technologies evolve.

The request largely mirrors previous outreach by bank regulators, although the NCUA expanded its scope to include the rapidly growing field of decentralized finance (DeFi). Unfortunately, the credit union response has been muted, so the NCUA extended its deadline for comments to October 27. SRM encourages credit unions to make their voices heard on this strategically important issue.

SRM responded to the NCUA, which you can read here. Our NCUA letter serves as a solid primer on the cryptocurrency topic and includes several examples of existing banking initiatives, the highlights of which we’ll summarize below.

Seeking Parity and Clarity

Our first recommendation is for the NCUA to look at existing regulations in the banking ecosystem and seek to mirror or further refine them to create a level playing field. Several clarifying letters from the Office of the Comptroller of the Currency (OCC) have paved a road for national banks and federal savings associations to introduce cryptocurrency products such as custodial services. Credit unions deserve similar opportunities.

Studies show that over 20% of people with investable assets are already investing in crypto. Such trading is usually done through a cryptocurrency exchange, and new, heavily promoted capabilities built into PayPal and Venmo are sure to grow that population. Research further indicates that more than 60% of Americans would prefer to trade through their financial institution, with whom they already enjoy a trusted relationship.

Although providing cryptocurrency solutions appears to be a complicated technical exercise on the surface, emerging partnerships between crypto firms and processing companies such as FIS, Fiserv, NCR, and Q2 promise to simplify implementation and rollout. Moreover, financial institutions are well-equipped to handle the various compliance challenges while providing consumers the solutions they desire.

The Wild West of Digital Assets

The NCUA request extends beyond turf the OCC has covered, venturing into DeFi as well. This is an interesting twist, given that a core objective of DeFi is to remove financial intermediaries like banks and credit unions from the equation. However, credit unions can leverage these same technologies to realize new efficiencies, allowing them to deliver profitable products at a lower cost to a broader array of members – many of whom may currently be underbanked. Such alternative solutions could provide an on-ramp for traditional finance solutions once assets and behaviors are established.

Contrary to the image of banks and crypto fueling fringe activity for a shadow economy, several incremental moves are available today that address demonstrated market demand. For instance, everyday debit or credit cards can be backed by digital asset holdings. This is akin to cards that draw upon brokerage accounts; recent bank launches have generated waiting lists of 100,000 or more for these products.

Issuers can also design programs providing rewards and/or accrued interest in crypto – an attractive solution to a member segment that may not be motivated by traditional reward premiums. Distributing cryptocurrency interest could stimulate engagement and offer greater potential appreciation, particularly given the low rates currently paid on deposit balances, and there would be no additional risk to the institution.

The Bottom Line

Although the NCUA’s request for comment prompted our detailed letter, SRM’s ideas for digital asset opportunities apply equally to banks and credit unions.

The digital asset space is poised to impact financial services significantly, and FIs need a level playing field and clear rules of engagement to compete. We encourage credit unions to add their voice to the conversation by commenting before the October 27 deadline.