Lack of Regulatory Guidance Limits Crypto Activity
One in five Americans have invested in cryptocurrency according to an NBC news poll, despite the digital asset’s wide price fluctuations and liquidity challenges.1
The rising interest in digital assets for both payment and investment purposes has credit unions looking to regulators to identify and standardize regulatory requirements that allow them to offer members access to digital products. This access is necessary to increase member engagement and enhance the value of the credit union-member relationship.
The National Credit Union Administration (NCUA) gave federally-insured credit unions the green light to partner with third party digital asset providers to allow members to buy, sell and hold digital assets with the third-party outside the credit union. Several credit unions began exploring options to offer this option to members, including Visions Federal Credit Union, which launched its tool in June 2022 [see “Crypto Convenience: How Members Can Easily Invest,” The NAFCU Journal, September–October 2022].
“The term ‘digital assets’ refers to a range of assets that include cryptocurrency such as Bitcoin and stablecoins, both of which are tokenized assets that don’t rely on a central bank or third-party institution to validate their value,” said NAFCU’s Senior Counsel for Research and Policy Andrew Morris. “Regulators are grappling with the challenge of providing guidance to financial institutions and each regulatory body has a different perspective.”
While there are options for credit unions to facilitate member engagement with digital assets, Morris does not foresee cryptocurrency attaining the same privileges or functionality as deposits in a federally-insured institution. “A scenario that involves credit unions holding digital assets as a recordable liability in a custodial capacity is unlikely to transpire until we have further statutory and regulatory guidance,” he said. “Credit unions, however, can act as a finder for members who are looking for a reputable third-party provider through which they can buy, sell and hold digital assets.”
Although sending members—and their money—to a third-party provider does create a relationship between the member and another organization, the opportunity to brand tools and serve as the trusted source of information and referrals can increase engagement and position the credit union as an innovator. Many credit unions have sought to learn more about opportunities in the digital assets environment due to concerns about the outflow of savings to cryptocurrency exchanges and other digital asset providers. “Credit unions have to know their members and understand what they want,” said Morris. The need for digital asset tools will be different for each credit union based on size, sophistication and member base, he added.
“Until we have clarity on the regulatory issues regarding custodial relationships and the treatment of digital assets as investments, credit unions cannot easily bring activities such as safekeeping and payments directly within their institution,” said Morris. “There is also the chance that digital asset legislation will classify certain cryptocurrencies as securities, which increases the challenge of directly offering the product to members.”
Making Digital Access Convenient
One component of digital assets is the digital wallet, which consumers are increasingly using due to convenience. Even if the credit union cannot be a direct custodian of cryptocurrency at this time, it is possible to engage members in discussions about different types of digital wallets, the pros and cons of each, and develop strategies that further build member loyalty.
Integration of digital banking with digital assets is on everyone’s roadmap, but even with regulatory questions to be answered, there are steps credit unions can take now to build a foundation for the future, said Sundeep Kapur, president of Digital Credence. “Digitization enables convenient, faster movement of money, which consumers want,” he said. “Unfortunately, financial institutions often focus on tactics rather than strategy, but planning to compete with mobile phone apps and fintech apps requires credit unions to step back and think strategically about a digital wallet program.”
When consumers wanted the ability to transfer money directly to another individual with funds from their checking accounts, institutions offered products like Zelle, which is expensive to the institution and rather than generating revenue, it was an expense, said Kapur. “You could partner with a fintech for a seamless member experience but if the fintech provider is not embedded into your digital wallet, you may end up losing the member to other services offered by the fintech.”
One credit union is looking at member data to drive the digital strategy, educate frontline employees and communicate with members, said Kapur. “They review member account statements to identify who is moving funds from the credit union to third-party wallets such as Cash App,” he said. Frontline employees as well as members are educated about the best ways to pay digitally—methods that are secure, easy-to-use and vetted by the credit union. “Then employees can encourage the use of credit union fintech partners or the credit union’s own payment app.”
Credit unions can enhance their value to members and improve loyalty by offering to review members’ various payment apps and provide suggestions on how to simplify and improve the process by reducing the number of disparate digital wallets. “Loyalty drives behavior,” said Kapur. This means members think of the credit union first when making a financial decision about checking, savings, loans or other products, he said.
The challenges to a digital strategy that includes payment or wallet options include the siloed approach to products in most financial institutions, said Kapur. This approach means separate “wallets” for digital banking, credit card transactions, debit card transactions, person-to-person transfers and bill payments—all of which require multiple technology investments, he explained. “Developing a successful strategy requires integration of all payment options into a simple, convenient app, portal or website for members.”
Kapur recommended that the organization begin by identifying one person to champion and lead the effort to unify payment processes. “The team will include representatives from the retail, lending, loyalty, operations and IT departments,” he said. It is this team that can identify and address what is needed to move forward, he added. “The solution for one credit union was a payment hub that gave members one place to visit for a variety of transactions. The hub serves as a platform to connect the different digital services offered by the institution.”
While fintech partnerships can be financially positive and reduce capital investment in IT infrastructure, choosing the right partner can be a challenge, admitted Kapur. “There are too many new, shiny objects to review,” he said. “You must have an overall strategy in place first so you can make sure the solutions you review help you meet your goals. If the solution does not help you unify payment processes, it won’t provide value to the organization and its members.”
As credit unions wait for regulatory guidance related to cryptocurrency, it is important to develop an overall digital strategy, said Kapur. “Digital money movement in all forms will continue to grow in importance. Credit unions must plan to offer a safe, effective, valuable way for members to move their funds or they will become irrelevant.”
- Franck, T. One in five adults has invested in, traded or used cryptocurrency, NBC News poll shows. CNBC. Mar 31, 2022. www.cnbc.com/2022/03/31/cryptocurrency-news-21percent-of-adults-have-traded-or-used-crypto-nbc-poll-shows.html
NAFCU & Digital Assets
“Digital assets are a key focus for NAFCU because whatever our members decide is best for their organization, we want to have the same authority as banks,” said NAFCU’s Senior Counsel for Research and Policy Andrew Morris. “We want a level playing field that includes consistent oversight and consumer protections.”
NAFCU’s Digital Assets Working Group meets quarterly to hear news, updates and discussion of current issues related to digital assets. Recent topics have covered interagency statements issued by the federal banking regulators regarding management of crypto-related risks, such as fraud, asset volatility and potential contagion risk within the sector. The group has also helped shape NAFCU’s principles for the creation of an appropriate digital asset regulatory framework.
NAFCU has also responded to inquiries issued by federal regulators regarding the potential creation of a central bank digital currency (CBDC)—a type of digital asset that would exist as a liability of the Federal Reserve. “NAFCU has long regarded government involvement in banking as a slippery slope fraught with risk and a publicly issued CBDC would likely create tension with traditional depository institutions,” said Morris. “While cryptocurrencies and other privately issued digital assets have established themselves as either investment or payment vehicles within the financial sector, a CBDC lacks the same clear value proposition. While proponents have claimed that a CBDC can promote financial inclusion and improve payment efficiency—those goals can be achieved more reliably by credit unions.”
Looking ahead, NAFCU and the working group will be eyeing legislation aimed at clarifying digital asset authorities, said Morris. “The association will also work to educate lawmakers and regulators about the costs and risks of a CBDC, and how existing financial sector infrastructure can offer a superior alternative for achieving the same goals.”