By: Lou Grilli, Senior Innovation Strategist, PSCU
As referenced in Part I and Part II of my blog series earlier this year, the rapidly evolving nature of cryptocurrency has led credit unions to explore its impact on the future of payments, real-time accessibility and potential risks. Recently, discussions among U.S. agencies around the regulation of cryptocurrency and taxing of gains are picking up momentum. This could bring some order, and possibly some safety, into the cryptocurrency exchange industry that historically has been rife with scams and losses from unscrupulous business practices.
Consider the following statistics:
- From October 2020 to May 2021, a record 7,000 people reported losses of more than $80 million due to scams, according to the U.S. Federal Trade Commission (FTC).
- The founder of Turkey’s largest exchange fled the country with $2 billion in assets belonging to exchange account holders.
- The founders of cryptocurrency exchange Africrypt disappeared – along with $3.6 billion worth of assets.
- Fcoin, an exchange catering to users in China, shut down with $67 to $125 million belonging to the customers. Cryptocurrency exchanges are now banned in China, which has also banned financial institutions and payment companies from providing services related to cryptocurrency transactions.
A Look at the Primary Risk Areas
There are three primary areas of risk associated with decentralized (or unmanaged) cryptocurrency. The first risk includes a new twist on existing scams: cryptocurrency investment schemes. The “wild west” vibe of the crypto culture, along with the element of getting in on something that’s still new and somewhat mysterious, plays into the hands of scammers. Fake crypto investment websites, giveaway scams supposedly sponsored by celebrities, and even online dating sites, are just some of the reported methods used to lure victims.
The second risk area surrounds valuations, which have increased and decreased dramatically in some cryptocurrencies. Given that there is no backing asset for decentralized crypto, market demand is sometimes driven by something as simple as a tweet from an influencer. This dynamic makes it difficult for merchant acceptance, as currency accepted in exchange for goods can be worth significantly less immediately after the purchase. As an example, bitcoin plunged 30% in one day (May 18, 2021).
Another risk area is the lack of security for exchanges outside of the U.S. These cryptocurrency exchanges are necessary to bring buyers and sellers together, just like their counterparts in the stock market. Prior to fintechs getting involved in crypto, individual users had to create an account at an exchange (many allowed anonymous accounts), make a purchase, and move the crypto into a digital wallet. Payments companies such as PayPal have established partnerships with exchanges to enable access to their clients, allowing individual accounts at the exchange to use PayPal to fund purchases.
Is cryptocurrency worth the risk? The answer is yes, if done carefully.
What Should Credit Unions Do?
Currently, only banks can act as custodians for digital currency, meaning banks can store cryptocurrency for their clients. To date, the NCUA has not indicated any similar allowance for credit unions. There is a need for advocacy for regulation on behalf of credit unions to allow those credit unions who wish to offer something competitive and be part of the conversation. One way to do this is through your league, or any of the national advocacy groups, including CUES, CUNA or NAFCU.
For credit unions interested in participating in crypto-friendly services, now is the time to have discussions at the board level to determine if cryptocurrency, stablecoins or central bank digital currency (CBDC), are options that align with your credit union’s mission. Think about redefining what the “checking account” of the future will look like with multiple digital currencies, especially when CBDC starts being issued. If you do proceed with a crypto offering for your members, be sure it is with an exchange that complies with Bank Secrecy Act, AML, FinCen, KYC and other regulatory requirements.
Regardless of whether your credit union plans to adopt cryptocurrency, your members are likely to be exposed to the topic. Unfortunately, there is far more interest than understanding when it comes to cryptocurrency, and most members may not be aware of the risks. The most popular cryptocurrencies also tend to be highly volatile. Depending on the timing of the purchase, members could see their “investment” increase or decline dramatically in a single day. Government agencies such as the FTC and the SEC offer advice and warnings to would-be crypto investors. These messages can be folded into member education.
Finally, be sure to keep up with the topic. The cryptocurrency industry, as well as guidelines for financial institutions in this area, are quickly evolving. Feel free to reach out to PSCU, your trusted partner, for further discussion.
Lou Grilli is a senior innovation strategist at PSCU, tasked with building and shaping a superior payment and member experience capability for PSCU and its Owner credit unions. Lou is currently focused on real-time payments and cryptocurrency. Lou participates on the U.S. Faster Payments Council, and is named on a patent for the use of blockchain for loyalty programs. He holds an MBA from Duke University and a master’s degree in Computer Engineering from the University of South Florida.