Cryptocurrency Offers Potential Opportunities and Some Risks for Credit Unions

April 22, 2022 Co-op Solutions


Dean Michaels
By Dean Michaels, Chief Strategy Officer, Co-op Solutions

NCUA Chairman Todd Harper issued a Letter to Credit Unions in December, both confirming and clarifying the authority that federally insured credit unions have to offer cryptocurrency services to their members through third party service providers. According to NCUA, cryptocurrency or digital assets are just a few of the terms used to describe distributed ledger technology (DLT) based tokens.

The guidance from the industry’s top regulator opens the door for Credit Unions to explore offering crypto services to their members via third party relationships, while ensuring the necessary legal, regulatory, compliance and member disclosure requirements are met. 

An attractive opportunity 

Cryptocurrency exploded into the spotlight in 2021. According to Pew Research, 16% of Americans claim to have ever invested in, traded or used cryptocurrency. Half of these owners. bought cryptocurrency in the past 12 months 

Crypto investors represent an attractive market for credit unions. According to some studies, half of crypto owners are under 35 years of age and three-quarters see their crypto investments  as an opportunity to increase personal wealth.  

The majority of Americans would buy crypto assets if they were able to manage it within their primary financial relationship. According to a Harris Poll conducted by ATM manufacturer NCR, “three out of five (62%) said they would prefer their credit union or financial institution to be where they go to get crypto.”  

This is likely why several previously dubious big banks, such as JP Morgan Chase, Bank of New York Mellon, Goldman and Bank of America are now dipping their toes in the crypto waters. 

For credit unions, there are a few avenues of potential opportunity within the cryptocurrency world: 

Crypto as an investment: Credit unions could look to offer investment services, which is where the bulk of consumer interest currently resides. Within this space, credit unions can explore offering the ability to hold cryptocurrencies in a custodial account, which would help to keep members’ deposits within the credit union’s four walls and protect the primary financial relationship. 

Credit unions can also serve a vital role in helping their members understand how crypto fits within a well-balanced investment and retirement planning strategy, as well as providing clear-eyed, objective guidance as to the significant risks of such investments. 

Crypto as payment: Compared with cryptocurrency investment, consumer demand for utilizing cryptocurrency as a form of payment is significantly smaller, and there are few opportunities for credit unions to get involved today.  

One area to watch in cryptocurrency payments is crypto-enabled ATMs, which are becoming more prevalent across the US. According to Experian, cryptocurrency ATMs are popping up in nearly every U.S. state and internationally, with 14,000 ATMs operating worldwide as of 2021, though other sources list that number even higher. 

While we believe that consumers will look to conduct Crypto transactions via digital, according to my colleague Terry Pierce, Director of Product Management at Co-op, “Market trends indicate that more Bitcoin ATMs are being deployed. Co-op continues to monitor this trend to understand credit union appetite and potential operational and compliance issues to which credit unions will need to adhere.” 

Crypto loyalty rewards: Another intriguing opportunity for credit unions lies in offering loyalty rewards in cryptocurrency. We do see some interest from consumers in terms of receiving rewards in this format, and it is something Co-op is exploring as a possible option to include with our Lifestyle Loyalty program. 

However, it is important for credit unions to implement their crypto program in a logical sequence of capabilities. You’re going to want to build your cryptocurrency investment capabilities first, so that your members have the ability to keep their crypto at your credit union once they receive it as a reward. 

Crypto offers benefits, and risks 

As the crypto landscape continues to mature and develop, credit unions that offer investment and advisory services to their members may be well-positioned to reap significant benefits. For one, it will enable credit unions to keep their members’ funds in-house, rather than risk losing them when withdrawn to the growing number of crypto wallet providers. 

A well-considered crypto strategy can position credit unions to attract the under-35 demographic that is already investing in this sector—a market segment that has been particularly challenging for credit unions. And by helping members understand how crypto fits within a broader financial wellness plan, credit unions can build trust and help to protect the primary financial relationships they have with their members. 

And of course, crypto investment services can potentially drive additional transaction fee income, contributing to a credit union’s bottom line. 

While market indicators, including rising consumer adoption, institutional engagement, investment dollars, and regulatory focus point to continued growth in the cryptocurrency sector, there is still risk that credit unions should be aware of when exploring this space. 

For one, crypto is an extremely volatile market sector. To date, cryptocurrency valuations have been on a strong upward trajectory, which may lead less sophisticated investors to assume their crypto portfolios will always increase in value. If credit unions are perceived as supporting their members’ investments in this volatile asset type, it could present some measure of reputation risk. 

As regulatory controls are still in development, credit unions should also keep a sharp eye on potential compliance, fraud, and identity theft risks related to cryptocurrency investment and transactional activity. 

What CUs should do now 

For now, Co-op recommends that credit unions continue to monitor the evolving cryptocurrency landscape and pay close attention to new regulatory guidance as it develops.  Whether you decide to offer cryptocurrency capabilities or not, it should be part of your strategic decisioning process. 

If your credit union is looking for a way in, the best place to start is by educating and advising your members on this complex asset class. Once you feel comfortable, you may wish to explore offering cryptocurrency as an investment option to your members. 

While the focus of Cryptocurrency has been as an investment and has yet to meaningfully impact payments, given the potential for growth in crypto payments, Co-op will continue to monitor the industry and our product team continuously evaluates if crypto fits into our product roadmap via direct builds or strategic partnerships. 

We will continue to share what we are seeing in the crypto marketplace, and provide research and guidance to our partner credit unions. 

Want to learn more about the exciting, evolving cryptocurrency sector and what it means for credit unions? Attend THINK, live in Chicago May 2-6, which will feature engaging breakout sessions on cryptocurrency and many other timely topics of importance for the credit union movement.  

CU Payments Oulook

The original article Cryptocurrency Offers Potential Opportunities and Some Risks for Credit Unions can be found on Insight Vault.

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