Credit Unions and Cryptocurrency: A Primer

This piece is based off of John Best’s talk at the CU 2.0 Brainstorm Event in July 2021. It is not intended to be comprehensive—rather, it will provide a cursory introduction to cryptocurrency.

Cryptocurrency is a decentralized digital currency based on distributed ledger technology. It is secured through advanced cryptography, making it extremely secure and nearly impossible to counterfeit.

Cryptocurrency has already caught the attention of the NCUA and other credit union bodies. CU 2.0 and others are working with the NCUA to explore topics and questions such as:

  • How do we get credit unions in the decentralized finance (DeFi)/blockchain world working together?
  • How does the industry take what the FDIC has published and make it better?
  • How can credit unions incorporate crypto and blockchain to further their mission of social and financial good?
  • How can credit unions benefit from and democratize the power of crypto?
  • How can credit unions settle transactions? Create stablecoins? Support members?

We’ll explore all this and more in this blog. But first, a quick introduction to crypto.

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What Is Cryptocurrency? A (Very) Brief History

Also known as simply “crypto,” cryptocurrency has been discussed since the 1980’s as an untraceable currency that wouldn’t rely on centralized financial bodies. But it wasn’t until 1998 that Nick Szabo wrote a white paper outlining one of the primary methods of cryptography for crypto (proof of work).

Nevertheless, the technology suffered weaknesses until 2008, when a person (or persons) going by Satoshi Nakamoto wrote a second white paper… one that included blockchain technology. The white paper laid the foundation for Bitcoin.

Nakamoto created Bitcoin less than a year later. And, though it started at a few cents per coin, it peaked at well over $60,000 each in 2021.

Today, there are countless cryptocurrencies, many of which fit various payments and contract niches. Additionally, most cryptocurrencies are tradeable on exchanges, such as Coinbase, Binance, and Kraken. Many people buy and sell cryptocurrency as digital assets (rather than their specific, stated purpose).

Here’s what it all means for credit unions.

Why Cryptocurrency?

First of all, a few credit unions are already working with crypto and blockchain. Second, the NCUA is exploring guidance and regulation to tap into the power of crypto for credit unions.

But there’s more reason than that to pay attention.

For example, Paul Fiore (founder of CU Wallet and Digital Insight) notes that there are major advantages and efficiencies in crypto. He says there will always be detractors to new technologies… yet those technologies improve, and eventually become indispensable.

The early adopters reap the largest gains. Those who wait usually struggle to catch up later.

But why do people like crypto?

Many people like cryptocurrency for various reasons. At its core, crypto is simply a form of payment that can be exchanged online for goods and services anywhere. Cryptocurrencies work using a technology called blockchain, which is a decentralized technology spread across many computers that manages and records transactions. This makes things more secure—and much faster than ACH or wire transfers.

Plus, crypto is permissionless. People don’t need anyone’s approval to join, and it’s (relatively) unregulated. Anyone can use it. Furthermore, crypto has shown a tendency to appreciate in value, and it doesn’t appear to be tied to typical exchange markets. This makes it an interesting portfolio diversification play for investors.

Not only that, but because crypto isn’t tied to centralized entities, it skirts around some inflation issues.

Why Should Credit Unions Care About Cryptocurrency?

There are many reasons why credit unions should pay attention to crypto. But we’ll briefly cover a few of the most important.

  1. You’re already exposed to it. Companies like Plaid mean that you’re already complicit in transferring funds and creating data.
  2. Your members use it or are interested. Huge sums of money are leaving the balance sheets of financial institutions and ending up on exchanges. And if members are interested in a financial product, it’s time to start thinking about how to help them with it.
  3. It’s part of the future of finance. Whether you like it or not… whether you believe it or not… crypto is likely here to stay in some capacity. It will continue to evolve and its weaknesses will be reduce or eliminated.
  4. Crypto provides new advantages and efficiencies. Each cryptocurrency brings slightly different benefits, but they all offer some improvements over traditional methods.

Ultimately, credit unions should do their own research—and a lot of it. Moreover, that research shouldn’t be from opinion sources only. Your team should understand the technology, what it’ll bring, and how it’s already affecting your institution.

Next Steps for Credit Unions and Cryptocurrency

There are many things credit unions can do to begin working with cryptocurrency and blockchain technology. For example, you might not want to start with creating a stablecoin until you’ve done the following three things:

First, research the technology. Your opinion on cryptocurrency should be informed by data and the people who understand it—not by longtime naysayers at traditional financial institutions.

Second, run reports at your credit union. How much exposure do you already have to cryptocurrency? How much money leaves (or enters) your credit union from a crypto exchange? How does this quarter’s volume compare historically?

Third, look into credit union-focused fintechs and CUSOs that work with blockchain technology. Many companies are approaching crypto and blockchain for your specific use cases… and they’re handling regulatory issues for you. For example, check out how Bonifii (formerly CULedger) uses blockchain technology for member identification purposes.