By Larry Pruss
Cryptocurrency, blockchain, and decentralized finance (DeFi) are transitioning from buzzwords to major industry drivers. Research shows more than 20% of people with investable assets are investing in crypto, and that number is expected to grow. These investors typically go through a cryptocurrency exchange, yet research shows that more than 60% would prefer to trade with their trusted financial institution.
Consumers have expressed their interest in cryptocurrency and related technologies. Credit unions should consider the opportunities and risks of getting involved with this technology – and carefully develop their cryptocurrency strategy.
Competitive Threats
Cryptocurrency and DeFi applications provide a store of value, can be used for efficient and inexpensive everyday transactions, and provide investment returns. That being said, they have already presented a competitive threat to the industry on several levels. Those threats are:
- Convergence. There are popular applications from Square and other fintechs that have been extremely successful in providing bank-like financial services. Suppose credit unions aren’t allowed to compete aggressively in this area. In that case, the threat of disintermediation will become greater as new applications converge to look more like full-service financial institutions.
- Safety and security of some of these solutions (i.e., lending or savings-like solutions). An underregulated market leaves consumers vulnerable to hacks and scams. Absent the right regulation, insurance and other protections could put members at significant risk.
- Credit risk. For example, a DeFi loan is essentially a way for several participants to pool their assets to lend peer-to-peer (as a collateralized product) to a borrower or pool of borrowers. While these lending products are over-collateralized, the additional use of traditional credit scoring or similar traditional finance protections could potentially lower the likelihood of default and further protect lenders – if credit unions potentially partnered with DeFi protocol providers.
Keeping a Pulse on New Developments
As the crypto space grows, credit unions must stay up to date with new developments to provide easy access to their members. Here are a few areas of focus to consider and to obtain additional guidance and support:
- Understanding crypto and DeFi use cases, market cap, and circulation is critical in ensuring quality cryptocurrencies are available for credit union members to purchase. Credit unions should consider strong coins/protocols with long-term sustainability that don’t have the likelihood of later being defined as securities.
- Ensuring proper Know Your Customer (KYC) onboarding and renewals are completed. This is an essential objective in understanding BSA/AML and OFAC risks and mitigations around crypto transactions. This includes transaction monitoring through identifying and understanding trends when it comes to the frequency of purchases.
- Credit unions need to understand each member’s purpose and the scope of using and transacting with cryptocurrencies.
- Offering adequate training for understanding how to serve members and their usage of cryptocurrencies is crucial. As cryptocurrencies evolve and become more prevalent as a payment source, it is important to ensure credit unions know and understand transaction types, market needs, risk of volatility, etc., when servicing and advising their members.
- Credit unions should understand staking and leveraged trading possibilities, and the impact on members interested in exploring these options.
Understanding is Paramount
Digital assets will significantly affect the credit union industry, so it’s paramount that credit unions fully understand the risks and rewards and have clear rules to engage with cryptocurrency and related technologies successfully.
Larry Pruss is Senior Vice President, SRM (Strategic Resource Management). He has nearly 25 years of expertise in payments. He has worked with leading financial institutions to develop strategies and plans related to card optimization, revenue enhancement loyalty marketing, and portfolio acquisition. SRM provides consulting services for banks and credit unions. SRM has been assisting credit unions by providing education and strategic guidance on blockchain, cryptocurrencies, and decentralized finance.