This week the National Credit Union Administration (NCUA) published a letter to federally insured credit unions saying it is supportive of them using blockchain technology. The NCUA is the U.S. federal agency that provides insurance. In December, it published a letter regarding digital assets.
However, the regulator added a number of caveats, such as the distributed ledger technology (DLT) should be used only for a permissible application and in compliance with all applicable laws. Credit unions are expected to conduct a thorough risk assessment of any DLT network, including for cybersecurity, compliance, reputation risk, liquidity, and third party risk.
December’s letter gave the green light for credit unions to engage third party partners to enable their members to hold cryptocurrencies and digital assets. But it did not explicitly give the credit unions the right to engage more directly. That’s something that the industry body NAFCU is keen to hear more about. Some have interpreted the latest letter as a green light.
A direct digital assets green light?
This week’s letter focused on DLT without explicitly mentioning the term digital assets, leaving room for interpretation. On the one hand, the credit union sector has been involved with blockchain for operational purposes (rather than crypto) for several years.
The term DLT was used throughout the letter and is often used to refer to private permissioned networks. In the letter’s introductory paragraph it mentioned “opportunities for credit unions to increase speed of service, improve security, and expand products and services.” Speed and security might imply operational applications, and expanding products could include digital assets and different types of payments.
In support of the digital assets interpretation, the letter states the credit union should ask whether the DLT is public or private. And some of the risk-related questions seem to apply to digital assets, such as liquidity risk.
A major credit union consortium has had a relationship with the public Hedera Hashgraph network since 2019. Hedera’s network is technically a DLT, not a blockchain, is public and semi-permissioned, given the key nodes are operated by large corporates.
NAFCU responded to the letter. “We appreciate that the NCUA heeded our call to adopt a form-agnostic approach to assessing how credit unions use digital assets and related technologies,” said SVP of Government Affairs Greg Mesack. “We will continue to articulate the credit union industry’s perspective on this topic and encourage the NCUA to continue building a sound digital assets regulatory framework.” And it published a blog post this week on digital asset strategies.
Credit unions are early adopters
Credit unions have been some of the earliest adopters of blockchain technology. In early 2018, CULedger (now called Bonifii), a credit union blockchain consortium, launched its first blockchain application for customer identity. As mentioned, it established a relationship with Hedera to explore cross-border payments in 2019 and also has partnered with enterprise blockchain firm R3 for blockchain-based payments and is a member of its Digital Currency Sandbox.