Article

The Cryptocurrency Challenge

silver and gold coins representing bitcoin and other cryptocurrency on a blue circuit board
Contributing Writer

11 minutes

Credit unions take first steps into the crypto world to provide services members have been getting elsewhere.

Heeding the common adage to follow the money, several credit unions have dipped their toes into the wild world of cryptocurrency in recent months. 

The money they’ve been following is their members’. Many credit unions have watched over the last few years as members have withdrawn deposits and redirected the money to crypto investments through other companies such as Coinbase

“When we talk to credit union executives, their starting point is that they have looked at deposit withdrawals going to crypto institutions,” says Rahm McDaniel, head of banking solutions for NYDIG, a bitcoin services provider for several credit unions. “They see the trend from 2019, 2020, 2021 and 2022. The numbers tell them there is a service their members want that they are not providing.”

McDaniel says it’s estimated that 20% to 25% of Americans currently own bitcoin. “I don’t think there is another example of a financial service that is that popular that credit unions don’t touch in some form or fashion.”

NYDIG’s research also shows that 80% of those who own bitcoin would rather keep it with their credit union if they could.

Last November, the National Credit Union Administration said that was an option when it told credit unions it was OK for them to get involved in the purchase and sale of cryptocurrency through third parties—but not to hold it on their own balance sheets. This regulatory clarity opened the door, and some credit unions have entered, while many more are taking a closer look at their options. 

“Credit unions have been watching endless outflows of cash to crypto exchanges, and many people would rather use their primary financial institution for their first foray into crypto investing,” said NCUA Vice Chair Kyle Hauptman.  “[The] guidance helps both concerns and gives a new revenue stream to credit unions [that] want to try it out. Financial services has always been ‘adapt or die.’ I don’t want credit unions to go the way of Blockbuster Video because we, the regulators, prevented innovation.”

Opportunities and Risks

Larry Pruss, crypto advisory services practice lead at CUESolutions provider SRM (Strategic Resource Management), Memphis, Tennessee, has been telling credit unions for the past few years that they need to take a close look at cryptocurrencies for opportunities and that they need to consider the eventual impact blockchain and distributed finance may have on their business. There had been growing interest in the message, but NCUA’s letter about its regulatory policy opened the floodgates. 

Pruss now heads a separate advisory group at SRM set up last November that is focused on cryptocurrency, and the group is working with a growing number of credit unions. SRM also recently produced a whitepaper on the subject: Cryptocurrency 2022: Converting a Threat into an Opportunity 

“Credit union executives need to start looking at this and talking to their various suppliers and get straight from their own perspective what they’re going to need to do to put it all together,” Pruss says.

But the last couple months have been a tough time for investors in bitcoin, the oldest and best-known cryptocurrency. Over the past year it has swung from $33,000 on July 1, to $67,000 on Nov. 9, to $28,000 on May 12, a pattern that has reinforced the skeptics’ view that cryptocurrencies are a dangerous investment that will never be useful as a payments tool. But McDaniel says most bitcoin investors are holding for the long term and have already seen it drop and then bounce back higher. 

In May, the crypto world was rocked by the decline of several stablecoins—cryptocurrencies designed to hold a stable price, which are in theory tied in value or “pegged” to actual currency such as the U.S. dollar, making them better choices for payment transactions. The collapse of TerraUSD and Luna, two of the estimated 19,000 cryptocurrencies, also sideswiped Tether, the most popular stablecoin and a key player in crypto trading, temporarily knocking it below its $1 peg.

This prompted regulators in Europe to warn crypto investors to be more careful. Consumers risk losing all their money invested in crypto assets, the European Union’s securities, banking and insurance watchdogs said in a joint statement.

“Consumers should be alert to the risks of misleading advertisements, including via social media and influencers,” the authorities said. “Consumers should be particularly wary of promised fast or high returns, especially those that look too good to be true.”

In early March, President Biden signed an executive order calling on the government to examine the risks and benefits of crypto, highlighting his interest in ensuring that consumers are protected while innovation is encouraged.

Rahm McDaniel
Head of Banking Solutions
NYDIG
Two years ago, if you were a credit union CEO and somebody said, ‘What are you going to do about crypto?’ I think, ‘I don’t know’ was a perfectly acceptable answer. I do not think that is an acceptable answer in 2022.

Education and Trusted Service

The European warning highlights an opportunity for credit unions: the chance to provide unbiased educational information on cryptocurrencies to help members find their way. 

For example, Quinn DuPont, founder of Crypto Research Consulting, and author of a report for Filene Research Institute, The Path Forward for Crypto: What Credit Unions Need to Know, says, “Credit unions may be well positioned to enter the crypto market by alleviating consumer concerns about security and safety.” But first they will need to educate their staff and executives.

DuPont found that many credit union executives had a fear of missing out on activity in the crypto area and felt that they should have acted earlier and started to educate themselves and their staff sooner. “One of the risks identified in the report is the difficulty around hiring and not being able to acquire talent to develop these kinds of systems,” he says. 

“Credit unions should also start investing in high-quality crypto education for their leaders, staff, and members,” he wrote in the Filene report. “Since education, training, and workforce development for crypto remains underdeveloped across the industry, credit unions may want to make direct investments in education or encourage policy makers to develop industry-validated standards, credentials, and other workforce development enhancements.”

A report by CUES Supplier member Fiserv, Brookfield, Wisconsin, makes a similar suggestion. According to the report, Three Cryptocurrency Actions for Financial Institutions: Navigating the Innovative Cryptocurrency Venture as It Gains Popularity, “Providing educational materials to help consumers learn about cryptocurrency and explore ways to buy, hold and sell cryptocurrency are two ways financial institutions can signal to consumers that their financial institution is committed to meeting their needs in this new space.”

Idaho Central Credit Union, based in Chubbuck, has been one of the early providers of bitcoin services, partnering with NYDIG, which actually handles the cryptocurrency end of things and holds the currency in a secure facility and on its books. 

CUES member Mark Willden, CCE, chief information officer at $8.7 billion Idaho Central CU, says the credit union is working with several fintechs in various areas. Its goal is to partner with new companies that can help it provide members with online functionality that allows self-service. People want instant decisions about such products as loans and the ability to get instant access to their money, he notes, something fintechs are able to help provide. 

Idaho Central CU launched its cryptocurrency service last November internally, then opened it to all members in January 2022. It worked with NYDIG and the state financial regulator to ensure everything was in place. 

Willden says the launch has created a buzz among members, and many have indicated they are pleasantly surprised that the credit union has ventured into this area. He expects users will talk to their friends about the service. The credit union has not promoted the service in a major way, but already about 11,000 members “have jumped in and started looking at it with us.”

The credit union is also seeing interest in bitcoin across all age groups. “It’s not just a young group,” but interest does decline in the over-50 segments, he reports. 

“We’re providing the tool for our members, and we disclose carefully with them that this is a relationship with NYDIG and there is some volatility in the market, so you need to know what you’re getting into,” Willden explains. “Those who are taking advantage like the convenience of doing transactions through Idaho Central.”

The CU uses the transaction fees it receives from NYDIG to cover the cost of offering this service to members. “It’s really about providing a service for our members, and it becomes another reason to stay with Idaho Central,” he says. Already, members who use the service are using the CU’s banking app more often to check on their transactions and monitor the value of their bitcoins. 

Idaho Central CU would like to offer a crypto rewards option with its credit cards and is also interested in allowing holders of bitcoin to use it as collateral for loans in the future. 

McDaniel of NYDIG says many of the credit union executives he talks to want similar features. The credit unions have many members with large bitcoin holdings that they don’t want to sell but would like to use as collateral.

“I think the more options that the member has is going to create more buzz, more interest and more investment opportunities,” Willden says. “Our longer-term strategy is to provide more investment options to our members.”

Setting a Strategy

Brian McHenry, SVP/principal with c. myers, Phoenix, says almost every credit union planning session in which his firm is involved now includes a conversation about cryptocurrency. “A lot of places right now are in the understanding, research and awareness-building phase. Some have gotten into it, but some are trying to first decide how they want to position themselves when it comes to cryptocurrency.”

McHenry says credit union leaders need to clearly understand their own biases and how they affect their decisions. Some executives are biased towards cryptocurrencies, while others lean the other way. 

“Even if you don’t believe in it, it is still worthwhile to research and talk about crypto and determine your position as an organization,” he advises. “It’s like any other trend in consumer behavior—you may ultimately decide not to do anything right now, but you need to understand it.”

McHenry says c. myers is working with many credit unions that are taking the first step of analyzing their cash flows to track money that is going to organizations that help members buy cryptocurrencies. “They are seeing how many members are actually doing this and then breaking it down demographically to understand if there are segments of their membership that are really interested in this, or is it more broad-based.” 

Many credit unions are surprised to see how many members are clearly interested in crypto and are already investing in it, he notes.

McHenry says that while until now the main interest among members has been in investing in cryptocurrency, there is growing interest in using cryptocurrencies, especially stablecoins, for payments. This is another area credit unions need to monitor because of the heightened potential for disruption.

“CUs should consider their basic approach to cryptocurrency: Is it more defensive; something they are going to offer but not highlight? Or is it more offensive as part of their value proposition and one of their differentiators in the market?” he says. 

DuPont notes that the crypto world is changing rapidly, and it can be difficult to keep up. During his conversations with credit union executives, he hasn’t found any experts, but most were well-informed and learning more. 

McDaniel says that shift is essential: “Two years ago, if you were a credit union CEO and somebody said, ‘What are you going to do about crypto?’ I think, ‘I don’t know’ was a perfectly acceptable answer. I do not think that is an acceptable answer in 2022.

“I think there are credit union executives who are going to come up with perfectly acceptable reasons not to offer a particular crypto service, but I think they’ll have a reason.”

McDaniel notes the 2022 What’s Going on in Banking study from CUES Supplier member Cornerstone Advisors, Scottsdale, Arizona, found that just under 25% of banks and credit unions plan to offer crypto services by the end of next year, suggesting it could rapidly become a mainstream service.

All the experts interviewed also said credit unions need to start thinking about the challenges and benefits offered by distributed ledger technology and blockchain. (Blockchain is a key component of cryptocurrency transactions but has other uses as well.) Such related developments as smart contracts could alter real estate practices, cut out third parties, and save time and money. (See recent NCUA guidance on DLT at tinyurl.com/0522ncuadistledger.)

It’s clear credit union executives will need to keep learning and evaluating how such innovations will impact their services.  cues icon 

Art Chamberlain is a writer who specializes in stories about the credit union system. 

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