Does your credit union have a cryptocurrency strategy?
The Biden Administration recently issued an executive order to coordinate efforts among federal agencies to create a national policy for digital assets. The order shows that these types of assets, including cryptocurrency, are here, and they're here to stay.
The order aims to "ensure that safeguards are in place and [to] promote the responsible development of digital assets." In other words, the directive was issued to build a framework so the US can catch up to other countries—and make innovation a top priority while protecting consumers and businesses.
The executive order isn't the only positive sign that crypto is gaining traction at financial institutions.
In December, the National Credit Union Administration issued a letter clarifying federally insured credit unions' authority to provide digital asset services through third-party relationships. The letter referred to "already existing authority," indicating that credit unions already had permission to forge relationships. Additionally, the inclusion of the phrase "does not prohibit" is telling. It indicates that digital assets have the green light.
The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. have also weighed in. Each has indicated that banks they oversee can pursue crypto projects, though both agencies want advance notice before a financial institution takes the plunge.
Also worth noting, the executive order encourages the Federal Reserve to examine the creation of a US central bank digital currency (CBDC), including its impact on financial inclusion.
Though the NCUA and other agencies make clear that these services need to be offered through third parties and that crypto assets are not insured, the letters should help institutions feel more comfortable dealing in digital assets.
Transitioning from Hesitancy to Adoption
The various announcements from the Biden Administration and certain federal agencies have ultimately shined a spotlight on consumers' interest in crypto. While many financial institutions are still dragging their feet due to unfamiliarity and regulatory concerns, these announcements show that the necessary compliance structures are in place.
A wide variety of service providers—established names and new entrants—have solutions to support such products. Several core and digital banking providers have developed integrations with financial institution-focused crypto firms, streamlining implementation.
Credit unions have some areas to consider before jumping in. Custodial services, rewards programs, trading services, mobile wallet integration, and lending services are all areas to consider – with varying levels of involvement.
US consumer cryptocurrency adoption is running at, or slightly ahead of, the pace set by the internet in the 1990s. That said, financial institutions need to get involved before it's too late. The executive order and letters from federal agencies have affirmed a financial institution's authority to offer digital asset services through third parties.
Acceptance Into the Mainstream
Regulatory action isn’t the only sign that digital assets are becoming more commonplace in financial services.
Standing-room-only crowds during breakout sessions at recent industry conferences nationwide are a strong indicator of financial institutions’ growing interest in crypto. Recent volatility in Bitcoin (and other digital coin values) has done little to alter crypto’s long-term outlook.
If anything, repeated recoveries—Bitcoin’s price has fallen by half three times since 2018, each time quickly rebounding—and continued consumer interest have been signs of resilience. As consumers vote with their dollars, moving deposit balances out of traditional accounts and into crypto exchanges, it’s no surprise that banks and credit unions are exploring the space with an increased degree of urgency.
Assuming the crypto market continues to show resiliency and evolve, financial institutions will eventually want to expand their offerings to include payment capabilities, lending against digital assets, and crypto-based rewards programs, among other things. Banks and credit unions should be careful not to repeat past mistakes in pursuit of a quick fix—the easy answer may not be the best.
Crypto service providers have struck partnerships with the leading core banking systems and stand ready to bring banks and credit unions to market quickly with turnkey solutions. We strongly advise our clients to closely examine the extensibility of these solutions, as well as the terms of underlying third-party partnerships. Banks and credit unions are all too familiar with siloed platforms that degrade the customer experience. This is an opportunity to avoid creating another silo that compromises future crypto product offerings.
Adding crypto solutions to your product line may seem like a daunting endeavor, but more people are becoming comfortable with the concept. Adopting a strategy to adjust to the wants and needs of the market can serve as an offensive tool (more revenue and client relationships) and a defensive one (managing deposit outflows). The key is to develop a thoughtful approach that is scalable over time.
Larry Pruss is managing director of Crypto Advisory at CUESolutions provider SRM (Strategic Resource Management). He brings more than 25 years of experience in payments and financial services technology to the table. Recently, Larry developed and now leads the cryptocurrency practice at SRM, helping financial institutions develop strategies for the next phase of the digital revolution.
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