Credit union regulator gives preliminary go-ahead on crypto partnerships

Credit unions have received their first green light from the National Credit Union Administration to partner with crypto firms to help members to manage digital assets.

Many credit unions were hesitant to delve into the cryptocurrency market amidst concerns of regulatory backlash from the NCUA. The agency offered clarity this month to address concerns voiced by many in the credit union industry.

"The NCUA does not prohibit federally insured credit unions from partnering with third-party providers of digital asset services that leverage evolving technologies,” Todd Harper, chairman of the NCUA, said in a letter to the industry.

Harper also provided credit union executives with supplementary guidance, outlining potential areas of concern such as member disclosures and topics to address when signing contracts with partners.

Visions Federal Credit Union in Endicott, New York, began working with the New York City-based Bitcoin servicer NYDIG back in October after reviewing conversations and existing signals from the NCUA. The credit union expects to launch the feature allowing members to buy, sell and hold digital assets through NYDIG in January.

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“We’ve become pretty close with the vice chairman of the NCUA, with the National Association of Federally-Insured Credit Unions and with many other trade associations, and we’ve been working to try and push for guidance like this … so this is what we were waiting for,” said Cynthia Schroeder, senior vice president and chief information and innovation officer of the $5.5 billion-asset Visions.

Schroeder anticipates that members who access NYDIG through the credit union's platform will want more cryptocurrency services.

“We are now interested in guidance to further our options in this newer space … the next areas of interest to us are related to actions allowed on blockchain platforms from a lending perspective, using cryptocurrency as collateral and more,” Schroeder said.

Visions is planning to launch designated sections for digital assets on both its website and intranet platforms to educate members and employees and disclose potential risks.

The NCUA has emphasized education surrounding cryptocurrency and distributed ledger technologies, warning that credit unions must not mislead members about the risks involved.

“Education is tremendously important not only for the employees of credit unions, but also for their members as well … to overcome that sophistication gap, it's important for credit unions to have in place ways for their clients to understand what are the risks that they face but also what the new opportunities are,” said Leon Marshall, global head of sales at the New York City-based digital currency brokerage Genesis.

Though the NCUA's letter is progress, it leaves many questions unanswered, according to Alenka Grealish, an analyst for the research and advisory firm Celent.

The disclosures listed in the NCUA’s letter assume that consumers already have some knowledge of the risks of investing in cryptocurrency, she said.

“A fundamental thing that’s missing, both within the letter and across regulators, is how do you describe this new asset class to consumers and to the mass market when nothing like this has ever existed before,” Grealish said. “Sure, you can tell the consumer that cryptocurrencies like Bitcoin are ‘heavily speculative’ and ‘volatile’ when advertising, but the challenge lies in how to accurately describe this through common language used by consumers.”

Beyond the credit union segment, many financial services companies are building out their offerings for crypto users.

Earlier this month, Visa launched its crypto advisory service that seeks to help its community depository clients assess different digital asset options, as well as develop and test novel product offerings.

According to research conducted by the card network, 94% of the 6,000 surveyed consumers that make financial decisions in their households are aware of cryptocurrency, with 33% of that group either purchasing or using cryptocurrency.

“Nontraditional players like PayPal and Venmo are leveraging crypto as a foot in the door to draw more consumers to them … with the ability to develop a banking relationship with as little as a mobile app,” said Stephen Bohanon, founder and chief strategy and sales officer of Alkami, a cloud-based digital banking platform that has partnered with roughly 170 banks and credit unions across the U.S.

These nonbank technology providers are as much a threat to credit unions as any bank is, according to Bohanon.

“I'm afraid that if credit unions say that they're going to do things the way they always do and ignore crypto, they're going to just see the continued disintermediation of members away from credit unions and into these direct-to-consumer fintechs," Bohanon said.