Crypto for Credit Unions: Blockchain, Crypto, and DeFi

This piece is based off of a roundtable discussion at the CU 2.0 Brainstorm Event in January 2022. It’s not intended to be comprehensive—rather, it will provide a quick look at emerging trends in credit union cryptocurrency, blockchain, and DeFi.

Cryptocurrency is making an explosive entrance into the world of finance. However, it’s been around for far longer. In fact, the very first cryptocurrency was introduced back in 2008, and the technology has grown in complexity and necessity ever since.

Integrating cryptocurrency in credit unions is vital—some would say it’s the future of banking. This is especially true now that use cases for blockchain and crypto are both member and CU-facing.

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Understanding DeFi for Credit Unions

Decentralized Finance (DeFi) is an umbrella term for a vital part of the cryptocurrency landscape. DeFi is a system that uses both cryptocurrency and blockchain technology to handle peer-to-peer (P2P) financial transactions on public blockchains (such as Ethereum or Bitcoin).

The consumer appeal of DeFi is that cryptocurrency can be held in digital wallets instead of financial institutions. This is especially important for credit unions to understand, because current DeFi disintermediates the credit union from member finance.

Understanding and offering DeFi may allow credit unions to increase their financial inclusiveness and mitigate otherwise inevitable losses. Along with increasing member satisfaction and maintaining their established member base, there’s an opportunity to acquire a larger member base as well.

 

Breaking Into New Territory

An important discussion regarding credit unions and cryptocurrency market featured at CU 2.0’s January 2022 Brainstorm Event. Expert panelists included John Ainsworth from session sponsor Bonifii, Connie Davis from Kairos DCC, Paul Fiore from Next Edge Crypto, and Kian Sarreshteh from CryptoFi.

While the importance of cryptocurrency integration in credit unions is undeniable, why it’s important—and how to use it—are vital.

These are the high-level takeaways from the session:

1.   There Is High Consumer Interest in Crypto

Kairos DCC found in their data that there’s extreme consumer interest in every state. Ultimately, that means that your members are interested—or already using—cryptocurrency.

She believes that credit unions will find ways of including crypto as an engagement solution for members. That is, certificates of deposit (CDs), credit and debit card rewards programs, and other products will attract users and provide ways to expose them safely to crypto.

2.   Blockchain and DeFi Use Cases Are Many

John Ainsworth revealed 10 pressing use cases for DeFi and blockchain technology for credit unions. Each, he said, is either offensive (an opportunity) or defensive (you don’t want to miss it).

Credit union crypto use cases include:

  • Digital identity: Offers portable, self-sovereign identity that is secure and private.
  • Insurance: Provides automated insurance claims, secured audits, and reduces paperwork.
  • P2P borrowing and lending: Ensures P2P lending and borrowing with high interest rates and low risks.
  • Payment solutions: Offers faster, safer, and more transparent solutions compared to legacy payment systems.
  • Decentralized organizations: Decentralized administrative entities can manage core financial operations.
  • Asset management: Allows buying, selling, transferring, and staking (to earn interest) on digital assets.
  • Compliance and KYT: Offers Know Your Transaction (KYT) to track transaction behaviors instead of user identity.
  • Analytics and risk management: Helps to analyze data for risk assessment and reduction.
  • Derivative and synthetic assets: Allows the creation of tokenized derivatives with added security.
  • Infrastructure development: Offers the tools to develop, integrate, and compile blockchain solutions.

3.   DeFi Powers Digital Transformation

In 2021 alone, Forbes reported that digital account opening was the largest movement in the financial industry. Paul Fiore noted that this is now table stakes for most new institutions.

The classic credit union response is, “if you don’t have a branch, how do you open an account?”

Last year, Coinbase opened 12 million accounts digitally. No branch. That doesn’t include other major players like Robinhood, eToro, PayPal, and Acorns, and more.

Compare that to Navy Fed’s 10.6 million accounts opened over the last ~90 years.

Finance and currency are going digital. New institutions and exchanges have solved problems that credit unions still face (online account opening) and are now solving problems of the future (DeFi). In many respects, it’s time for credit unions to catch up rather than to lead. Fortunately, credit unions can take their cue from these quickly growing crypto market leaders.

4.   Credit Unions Are Losing Money to Crypto-Friendly Competitors

81% of crypto users said they would rather buy crypto from their credit union if given the choice. Members are ready to buy, sell, trade, and stake through a trusted, centralized solution.

But if they can’t get it from their credit union, they’ll get it where they can.

Depending on the size of the credit union, they could be losing huge amounts of deposits per month. Multibillion-dollar credit unions often see millions of dollars exit their institution each month. This is money that rarely reenters the credit union ecosystem.

5.   Offering Crypto to Members Is Relatively Simple

Generally, you’ll want to offer more than just bitcoin, says Kian Sarreshteh. You’ll need:

  • A technology provider. This partner will help you integrate with your core and mobile provider and the rest of your tech stack.
  • A liquidity provider. This party will fulfill orders to ensure that transactions occur as they’re supposed to.
  • A crypto custodian. The custodian holds and manages cryptocurrency assets on behalf of your members.

What Stands in the Way of Crypto for CUs?

Financial institutions have previously expressed hesitancy due to past failures of digital currencies. One of the largest reasons for this failure were unsolved issues like double spending. Today, these issues no longer exist. Credit union should feel dramatically more assurance and comfort.

As crypto continues to grow, it’s anticipated that previous forms of transactions will begin moving towards obsoletion. When comparing processes such as wire transfers to crypto transfers, the time required to complete the verification process is upwards of an hour versus almost instantaneous for crypto. This may continue to push institutions and consumers alike towards crypto and away from traditional banking. Likely within the next year, traditional finance will need to begin expanding their customary offerings such as certificates of deposits and credit cards into cryptocurrency.

A frequently expressed concern has stemmed from the lack of widespread education regarding crypto. Especially as the market begins to expand and accept this new form of currency, proper education is becoming increasingly important. As credit unions begin to integrate digital currency, education will need to be of the highest focus. Connie Davis specifically stresses the importance of running parallels when educating credit union employees as well as consumers. By rooting the new information in parallels with previously understood technology, the likelihood of overall understanding and acceptance will increase drastically.

The Present and Future of Credit Union Cryptocurrency

Experts predict that the number of credit unions interested in crypto integration will continue to expand over the next two years. Specifically, they anticipate that 10% of credit unions will have adopted crypto by the end of 2022. By 2023, they predict that to increase to 40–50% of credit unions.

What is happening right now is a massive loss for CUs not adopting crypto. Upwards of billions of dollars have been lost due to customers pulling funds to use elsewhere for cryptocurrency purposes. Because of this, it’s key that CUs begin the education and integration process as soon as possible.

Experts predict continued infiltration of crypto within the finance industry n the next five years. Paul Fiore of Next Edge suggests that credit unions begin offering customers a more simplified version of a money market account in which they can earn higher yields, as that’s often most important to the vast majority of consumers. This would be a successful move for credit unions, especially due to the projected movement towards crypto as a country.

Connie Davis, co-founder of Kairos DCC, predicts that nearly 50% of Americans will own crypto in the next five years. An already immense loss would be further increased should this come to fruition.

John Ainsworth recognizes the credit union deposit losses to crypto exchanges, but he also sees a loss of non-interest income (NII) potential. Fortunately, he also sees an opportunity for credit unions to generate NII through crypto offerings.

How Does Crypto Fit Within My Credit Union?

Cryptocurrency provides countless opportunities for credit unions, including a new avenue to market themselves, an added revenue stream from transaction fees, and a way to increase mortgage and lending business.

By integrating crypto into the traditional banking setting, members may increase their purchase ability as they have consolidated collateral. Although cryptocurrency is not widely accepted, the knowledge of a member’s digital holdings would allow for increased likelihood of approval when it comes to financed purchases.

Join the Conversation

CU 2.0 hosts biannual Brainstorm Events featuring expert panels of credit union and fintech leaders. Topics range from marketing challenges, leadership strategy, and data analytics insights, to emerging technologies such as artificial intelligence (AI) and blockchain/DeFi.

Each session features ample discussion and networking time. Save your spot at our next one here.