The Case for Credit Unions and Cryptocurrencies

Posted on April 21, 2022 at 11:07 AM by Martin Walker


By Martin Walker, Vice President, Next Level Ventures


It’s 2022, and cryptocurrency is the hot, sexy space. As of the end of January 2022, there were over 81 million wallet users [1]. Coinbase ended 2021 with 11.4 million monthly transacting users and over 89 million total verified users [2]. Trading volume on Coinbase hit $547 billion in the fourth quarter of 2021, up 67% from the prior quarter [2].

Why is cryptocurrency so hot? Different people have different reasons, but the overall appeal is undeniable. Some are drawn by the possibility of insanely high returns, which can come with equally high risk. For others, cryptocurrency represents the democratization of the exchange of value on a global scale. After all, cryptocurrencies are built on blockchain technology, where every transaction is immutable and visible for all to see and validate.

If I were to describe an organization that was created, funded and self-governed by its community of users, you might think, “that sounds a lot like a cryptocurrency built on the blockchain.” Or, you might also think, “that sounds a lot like a credit union,” and, of course, that is an oversimplification of the origins of the modern-day credit union.

Unlike cryptocurrency, credit unions may not be thought of as very sexy. They do, however, occupy a hot space – a space that many would like to access. As of about a year ago, there were over 5,000 federally insured credit unions with over 125 million members [3]. Many of those credit union members already participate in the cryptocurrency ecosystem; however, many more are sitting on the sidelines. Some would argue that those people are risk averse and will never be active cryptocurrency asset holders or investors. However, a 2021 NYDIG survey found that 51% of non-bitcoin holders were interested in accessing it through their financial institution, and that 81% of bitcoin holders would store it with their financial institution if offered [4].

At their core, credit unions do three things, and they do them very well: store money, move money, lend money. In this context, the term money refers to assets held in U.S. dollars. Cryptocurrencies, being digital assets, can enable credit unions to offer more value to their members in all three of those areas.

Store Money

While it may seem to be a reach for U.S. credit unions to move beyond storing U.S. dollar assets to include digital cryptocurrencies, they have been storing our U.S. dollars digitally for a long time. The current balance of each of our checking and savings accounts is simply a digital record of those assets, only partially backed by U.S. currency on hand. For those who prefer to store their cryptocurrency with a financial institution rather than a fintech platform or decentralized organization, credit unions are perfectly positioned to provide this service.

Move Money

While the movement of U.S. dollars is largely facilitated through digital means, and the movement of cryptocurrencies is entirely digital, the big difference is the method in which those balances change. With U.S. dollars, balances are most often changes via settlement, although new real-time options are quickly changing that landscape. In cryptocurrency, the change takes place on a blockchain. In both cases, an audit trail exists to validate the transaction that resulted in the change. There are a number of use cases that lend themselves well to cryptocurrencies. Foreign exchange transactions could be executed much faster and cheaper by using cryptocurrencies as an intermediary vehicle rather than institutions. Taking it a step further, if two parties are both comfortable exchanging value in the form of cryptocurrency, foreign exchange can be taken completely out of the equation. Another use case is real-time movement of large sums of money between organizations. New use cases are being explored continuously, and credit unions can enhance their ability to remain relevant in this new landscape by facilitating these types of transactions.

Lend Money

In the lending space, cryptocurrency can perform in multiple roles. A cryptocurrency can be the currency that is being loaned to an individual, instead of U.S. dollars or other fiat currency. In some cases, it may be preferred, as cryptocurrency may be a more efficient way to acquire the goods and services tied to the loan’s purpose. Another role is that of collateral. Several solutions are being developed that allow cryptocurrency holders to use a portion of that collateral to secure loans, which may be executed in cryptocurrencies or fiat currencies. By participating in these types of lending activities, credit unions may be able to leverage their efficient lending operations to provide these services in a better way than other competitors.

But cryptocurrency is scary. It’s volatile. While the blockchain may be immutable, there are stories of cryptocurrency being stolen. As of March 2022, there are over 18,000 different cryptocurrencies in existence [5]. Rug pulls have taken place, where developers promote new projects to investors and then disappear. In 2021, rug pulls accounted for 37% of all cryptocurrency scam revenue [6]. How does a cryptocurrency novice know which cryptocurrencies are real and which ones are scams? In addition to those concerns, the market itself can be highly volatile. Investors can gain, or lose, millions overnight.

While many proponents of DeFi, or decentralized finance, cringe at the idea of government involvement, some are suggesting that cryptocurrency needs oversight and regulation. In March 2022, The White House issued the Executive Order on Ensuring Responsible Development of Digital Assets. Among the goals of the order are to protect consumers, investors, and businesses and to protect United States and global financial stability and mitigate systemic risk [7]. As the government works toward a regulatory framework for the cryptocurrency industry in the United States, many cryptocurrency insiders are supportive of the efforts to legitimize the industry and elevate its reputation.

The NCUA is on board as well. At CUNA GAC, the NCUA board’s vice chairman Kyle Hauptman said, “I don’t want to see credit unions go the way of Blockbuster Video because their regulator did not evolve and give them clarity around (cryptocurrency). We know we have to provide credit unions clarity here so they can compete.” [8] The agency took a step toward helping credit unions compete in December, when Chairman Todd Harper penned a letter that clarified federally insured credit unions’ ability to establish relationships with third-party providers to offer digital asset services to their members [9].

Speaking of which, credit unions’ number one asset is their reputations. They cannot jeopardize that to offer cryptocurrency or any other products or services. Working closely with the White House, regulators and policy makers, and cryptocurrency industry leaders to create a healthy and safe ecosystem is in the best interest of credit unions and all involved parties.

Some would say it’s already over. Credit Unions already missed out on the crypto movement. It’s too late. And that may be true for the early adopters, the supporters of DeFi, those who rail against the institutions and the “establishment” it represents. But a large segment of the population is just dabbling in crypto, not really taking it seriously. And an even larger segment of the population is interested in crypto, but sees it as being too risky to dive in. They are looking for a place they can trust to test out the waters. And that trusted place can, and should be, credit unions.

There are many disruptors out there, individuals who embrace DeFi, DAOs (decentralized autonomous organizations), and a completely decentralized ecosystem where institutions such as credit unions no longer have a part to play. But weren’t credit unions the first DAOs? They were formed by people with a common bond, who wanted to make decisions to help the members of their group without relying on banks or other for-profit institutions. Member-owned credit unions are the perfect partners for blockchain-based technology, including cryptocurrencies. They are member-owned, but also regulated to ensure the membership isn’t damaged.

Several companies have set out to enable credit unions to serve their members with cryptocurrency products and solutions. These partnership opportunities exist today. But, to remain relevant and take advantage of their unique position, credit unions must do something that they don’t typically do. They must act fast. This opportunity is here today, and it will be seized. No one is going to give credit unions a head start – they can, and must, act now.