BankSocial's plan to create a crypto-friendly credit union

Cryptocurrency remains a controversial topic since the collapse of the crypto exchange FTX near the end of 2022, as both banks and credit unions continue to rethink best approaches to the space without drawing the ire of financial regulators. But a team of people at a startup called BankSocial hope to launch a new credit union that would let people buy and sell digital currencies and maintain fiat currency deposits using distributed ledger technology. 

Closures of crypto lenders like BlockFi and Celsius have exacerbated concerns about the industry's path forward, pushing consumers toward traditional financial institutions for answers on where they could safely store the digital assets. As regulators continue to crack down on instances of misuse, many wonder if now is the right time for depositories to enter the market.

For John Wingate, chief executive and founder of the Dallas-based distributed ledger technology firm BankSocial, all signs point to yes.

Wingate was inspired by the similarities between the ownership structure of credit unions and "the ethos of decentralized finance" to begin the campaign for a federal credit union charter under the National Credit Union Administration at the beginning of last year. He brings with him more than 15 years of software development experience working for companies like the Las Vegas-based customer experience and fulfillment firm Speed Commerce. He has also launched ventures of his own, such as a content management software firm, Mastered Minds, and two real estate funding companies.

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"The more I started to look into it, the more I started to understand that these credit unions were really a great mechanism. … I actually came to the conclusion that they were really just an analog version of decentralized finance," Wingate said. 

The proposed Defy Federal Credit Union, which was announced publicly last month, would offer members access to BankSocial's platform which includes its self-custody crypto exchange for buying and selling currencies like bitcoin and ether, in addition to a deposit account. Eligibility would be extended to the roughly 4,000 members of both Block Advocates, a nonprofit organization founded by Wingate to help promote the adoption of distributed ledger technology as well as the Texas Blockchain Council, which includes firms like Riot Platforms and Genesis Digital Assets.

Members interested in services like loans not offered by the credit union would be referred to BankSocial's growing network of more than 50 vetted credit union partners. No other details were made publicly available.

Payments and other operations of the institution, including records of member deposits, would be kept on the Hedera public ledger, which records the data across its nodes by allowing each participant to vet and approve the information before it's unilaterally approved for committing to the ledger. Personal member data such as Social Security numbers and home addresses will be stored separately from the ledger.

The Hedera ledger uses a process of communicating transaction data known as a "gossip about gossip" protocol that ensures items are securely and fairly stored via a consensus. The nodes are in turn overseen by Hedera's global governing council, which currently consists of 29 organizations such as Boeing, Ubisoft and Google that hold positions for a three-year maximum term with the potential for a second consecutive term.

Wingate and others are still working through phase two of the NCUA's chartering process and have recently submitted the final round of documents outlining everything from the proposed board of directors to policies and procedures for daily operations.

"Our end goal is not to create the largest credit union ever invented with [the proposed] Defy Federal Credit Union, but rather to create a template" where credit unions can easily participate in a Web3 ecosystem, Wingate said.

Since the NCUA released its request for information on digital assets and related technologies in 2021, regulators have been continuing to provide clarity on partnerships with firms that provide access to such services. Agency officials have also provided further insight into regulatory expectations for institutions that plan on using DLT in successive letters.

Due to the credit union market's limited exposure to crypto, leaders with the NCUA are instead focusing oversight efforts on the "underlying DLT and blockchain technology" to mitigate the risks associated with "third-party service provider arrangements that offer exchange and custody services to credit union members," said Charles Vice, director of financial technology and access for the NCUA.

"The use of this technology, as with any financial technology tool, has risks that must be managed as well as potential opportunities to improve operations and enhance member services," Vice said.

Banking regulators have been resistant to the idea of approving new crypto-focused charters, greenlighting only a handful of instances in recent years that include the Cheyenne, Wyoming-based Custodia Bank and Anchorage Digital Bank in San Francisco.

Nathan McCauley, co-founder and CEO of Anchorage Digital Bank, said having a license from the Office of the Comptroller of the Currency helps strengthen against market volatility by "legally requiring a segregation of client and company accounts" which he said "forms the basis of protections in bankruptcy." The bank commenced restructuring plans earlier this year to onboard new talent skilled in risk management and compliance.

While de novo bank charters have remained infrequent, the NCUA has been working to streamline its process for startup credit unions by eliminating redundant steps and drafting an updated guide for applicants. More recent developments include issuing provisional charters for those that have met all other requirements for finalizing capital requirements.

A credit union charter may be easier to obtain than a bank charter, said Grant Butler, a partner at the global law firm K&L Gates who is experienced in representing financial institutions on regulatory matters.

"I think you would not see a very likely path to a new institution being chartered with this business model as a bank. … The NCUA, despite being a different regulator than the other federal banking regulators, has expressed similar safety and soundness concerns, but maybe has not signaled as strongly of a degree of caution," Butler said.

Uncertainty among credit union and bank leaders around how to engage in the digital asset ecosystem could soon change despite legislators failing to make progress on any concrete policies.

Experts with Javelin Strategy & Research say institutions are starting to rekindle relationships with third-party vendors that were halted in the wake of FTX's collapse and other court cases as overall levels of negative attention have died down.

"Over the last few months, you're beginning to see more announcements and movement from credit unions going back to those same vendors saying, 'Okay, we were talking to you a year ago and we've stepped back, but now it looks as though there's a little bit clearer path or at least a better understanding of what we need to be paying attention to from a more compliance and regulatory standpoint,'" said James Wester, director of cryptocurrency and cohead of payments for Javelin.

BankSocial leaders estimate that they will receive a decision from the NCUA sometime in 2024, but remain optimistic that its focus on a growing field of consumers interested in cryptocurrencies and related open banking technology will sway regulators toward an affirmative vote.

"We feel like the future is going to be individuals saying, 'I have a very specific group of people that have very specific needs' and a credit union is uniquely positioned in order to provide products and services that are very specific to the groups of people that they serve," said Becky Reed, chief operating officer of BankSocial.