What they need to know
As Bitcoin and other popular cryptocurrencies continue to develop and increase in popularity, credit unions should know what that means for them. The number of members who explore cryptocurrencies is expected to continue to rise, so knowing how to educate them is important.
What is cryptocurrency?
Cryptocurrency is a form of currency that only exists digitally and relies on encryption for the security of transactions. There are thousands of forms of cryptocurrency, with some of the best known named Bitcoin, Ethereum and Ripple.
The National Credit Union Administration’s 2018-2022 Draft Strategy Plan last fall released comments on this technology saying, “The emergence and the increasing importance of digital currencies predicted by many analysts may pose both risks and opportunities to consumers, credit unions, banks and financial regulators.” The report's authors later add, "These trends are likely to continue, and even accelerate, through 2022."
A wider use of cryptocurrencies across the United States, along with the development of other popular fintech, will influence the way credit unions operate. Therefore, it is important to educate your members on the risks surrounding cryptocurrencies. These include:
1. High volatility: In 2017 the price of Bitcoin skyrocketed to almost $20,000 from under $1,000 and fluctuated thousands of dollars daily. Janet Yellen, former chair of Federal Reserve, described Bitcoin as highly speculative in her final press conference: “[Bitcoin] is not a stable source of value, and it doesn’t constitute legal tender.”
2. Lack of regulation and security threats: In a February hearing, Jay Clayton, chairman of the U.S. Securities and Exchange Commission, said “We the SEC and CFTC do not have direct jurisdiction over the popular markets that trade true cryptocurrencies. … If asked, we will work with other regulators to evaluate this issue.” Although the SEC may become increasingly involved, cryptocurrency exchanges are not regulated; investors are not protected by theft or fraud. The SEC warned investors that losses due to illegal activity may not be recoverable.
3. Fraudulent initial coin offerings and scams: Clayton also stated in the same February hearing that ICOs are being conducted illegally and are not registered with the SEC. Prodeum is just one of of the most recent phony cryptocurrencies that shut down after collecting money for an ICO. One-Coin and BitConnect are two platforms that have shut down this year after facing ponzi scheme allegations. The SEC voices its concern with ponzi schemes in this Investor Alert.
4. Cryptocurrency purchases with credit cards: One site compares the riskiness of buying cryptocurrency with a credit card like charging stocks. If the price drops and buyers can’t keep up with the card payments, they could face interest and fees.
Some other notable risks accompanying cryptocurrency include the slow adoption of merchants, tax implications and scalability. The issue of scalability arises from the inherent limits of the cryptocurrency concept and is becoming more distinguished as popularity increases: Block size limits and higher transaction fees as a result of increased transaction volume pose a threat for the future of cryptocurrency. Read more about the issue of scalability.
If you haven’t already, it is likely that your credit union will encounter some type of cryptocurrency or questions, so be prepared to educate your members to exercise caution when investing.
Marin Goodwin is product and marketing team Intern Sageworks, Raleigh, N.C., a financial information company that provides lending, credit risk, and portfolio risk solutions to over 1,200 financial institutions across the country. To learn more about questions your members may have about cryptocurrency, and the associated risks, watch a recent on-demand webinar hosted by Sageworks for business advisors: Preparing for a Barrage of Cryptocurrency Questions.
