LAKE BUENA VISTA, Fla.
In introducing a panel session discussion on crypto here, one person pointed out it had been deliberately named, while another observed that credit unions reporting their members aren’t asking for crypto-services, those members aren’t going to ask. They are just going to go elsewhere.
“The session is called ‘The Crypto Craze: Where and How Should CUs Get Started,” said Lou Grilli. “It’s how and when. Not if.”
Grilli, an innovation strategist with PSCU, served as moderator of the session during the NACUSO Network Conference here, where the four panelists all reinforced Grilli’s observation in different ways, emphasizing that every credit union should be well into its strategy for crypto by now—with one CU CEO further suggesting it’s not about the crypto at all.
From left, Becky Reed, John Ainsworth, John Wingate and John Ungerland at NACUSO Network.
Participating as panelists were Becky Reed, CEO of Lone Star Credit Union; John Wingate, CEO and founder of BankSocial John Ainsworth, CEO of Bonifi, and John Ungerland, CIO of DaLand CUSO.
Grilli, who said he’s been in payments for 20 years and “nothing I’ve worked with has been in the news cycle so frequently,” had the following questions for the panelists.
Grilli: As CEO of a credit union, your primary responsibility is to your members. Why is this in the best interests of members?
Reed: The first thing I think you should do as a credit union leader is look at your data. I think you will all be surprised to find out your members are already trading in crypto. We are just $165-million in assets, but in any given month we have about 100 transactions going out to Coinbase and other digital wallets. I don’t consider my membership any different than the rest of you.
My personal opinion is crypto is the shiny object. I don’t think crypto is what we need to be paying attention to as financial institutions. I believe the important part is how crypto moves on the blockchain. It’s going to revolutionize payments as we know it and also digital IDs. Soon, members will be demanding a safer way to be identifying themselves. It will no longer be about date of birth or Social Security numbers. All of those things are already out there in the universe. It’s really the blockchain we need to be paying attention to.
Wingate: I would even take it even further. When we looked at the primary regulatory framework for these decentralized, distributed networks, we saw credit unions as the analog defi. And we said we could take these decentralized distributed ledgers—you’re already doing defi (decentralized financial institution) but in analog way—we can digitize this and bring this concept of a credit union into the 21st century. It’s really a step above a revolution. It’s an evolution. Once we step through it I don’t see people stepping back. There is a huge opportunity to essentially revamp the credit union model ecosystem.
Ainsworth: The first term I will throw out is ADT– It’s about damn time. My first conversation on this was back in 2018. In 2019 we did our first use-case. So, here we are talking about should we get involved. The answer is a definitive yes. If you look at your balance sheet right now you’re going to see impacts in deposits. But you are also going to see it in interchange. Interchange is going to go away. There will be no interchange.
Ungerland: The answer to how to get involved in the crypto space is to understand that these networks are being discussed, that they are decentralized ways of storing data. Your institution is a natural analog to a decentralized way to house data. But why would you get involved? Why does it matter to your members? We aren’t in the early days of bitcoin and blockchain. We are in the early days of institutional adoption. We have to ask ourselves as FI leaders, are we in the late days of something else, like an electronic dollar and SWIFT system? Are your members interested in ways to safely store their data. Human beings will always look for secure and trustworthy places to store the fruits of their labor. A lot of them are already exploring it. It’s very plausible that the way to get involved as a credit union is that you can store and control that data on a core. Then you can be plugged into the future of your members by storing their wealth. Centralized systems are great for a time. We’ve lived through 50-60 years of a very powerful centralized banking system. But don’t put all your eggs in one basket. There comes a point in time when in communities it’s better to distribute out the data and the wealth and to store it in a different way.
Grilli: This is a completely new world. How do we stay compliant?
Wingate: It’s not as complex as one would think. We have been looking at solutions with Bonifi that we really love. You can reduce the compliance with self-sovereign identification solution. You were holding all this data in your systems. You are essentially saying, ‘Hey, I’m the door you need to come kick down.’ The idea is that you can still be fully compliant and still do full KYC and AML and you don’t have to layer on these significant costs that exist today. I would say that it is actually as big a barrier as most people make it out to be. The other thing is with these decentralized platforms the focus should be on how to you get revenue out of it, reduce risk and liability and create a great member experience. That should be the paramount questions with any new technology.
Wingate: PayPal is a digital currency if you think about it. A Starbucks card is stored value. They are just 1’s and 0’s. You are already in it. If we are the one to legitimize it, what a great state.
Ungerland: When we talk about regulation, please bear in mind that as local, decentralized FI, you are this natural fit for these networks that are being built out because people aren’t trust in centralized institutions. These give you a way to plug in. From a regulatory perspective you have a very important part to play in this. You have to get vocal about this space. Absent your local institutions advocating for the value of local decentralized money, you can pretty much rest assured the trend will be toward a hyper-centralized form of this technology, like a central bank digital currency. Members are going to be in direct-to-Fed relationships. That’s why it is crucial.
Grilli: Fraudsters love crypto currency. How do you provide security?
Reed: it doesn’t have to be complicated. At my credit union we had to get together and say, ‘OK, members are buying and selling crypto today and all of them are exposed to fraud in some way. All of them have bad guys coming after them. Those things we are required to report.’
So, where does crypto come into that if members are being taken advantage of by bad guys? Crypto was originally used by bad guys trying to circumvent the traditional financial institution. How can we be compliant with AML/BSA? It’s really about looking at your data. If something doesn’t look right, it’s probably something you should be reporting. Right now, there are not a lot of fraud mitigation tools out there to protect consumers.
Grilli: You stated crypto is the payment of the future.
Reed: Again, it’s not the crypto, its blockchain. At the end of the day the U.S. dollar is just a stablecoin. This is going to be so disruptive in our space. It’s about creating a completely new type of financial institution in which the foundation is something different than analog. We have to pay attention to this. It is going to disrupt traditional ways of doing things.
Wingate: Is it much easier to track blockchain transactions once you know what you’re doing. You have to start looking at the ability to provide not just security but the ability for people to trade value in a secure and trusted way in real time. The Lightning Network can transfer 50x what Visa and Mastercard can do right now. When you take all these things into consideration, there is no case against it not being the pay rails of the future.
Ungerland: Crypto is already larger than the entire credit union industry. That’s another good reason to get plugged in and educated about this stuff. (Ungerland shared one person’s observation) “There is more risk in 180,000 seconds than there is in 3 seconds.’ That’s the two to three days.
Grilli: What does custodial mean? Digital assets all need a digital wallet to store them. NCUA has provided some guidance and said credit unions are not allowed to be custodians of digital assets yet. What is your take on custody and should CUs be involved?
Wingate: When we started looking into this and had some discussions and it didn’t sound like it was so much about the custody of crypto. It was, ‘Can I hold it on your balance sheet?’ The answer is no. So, in the question of custody or non-custody, is the risk worth the reward? I personally don’t think so. I think there are other ways to monetize the ecosystem. The last thing you want is to be a credit union where you are one of the first ones to have a big hack. I’m not a big fan of giving my crypto to be held by someone else.
Ainsworth: You can store assets like diamonds in the safe deposit box. You are the custodian, but that is not on your balance sheet. With the safe deposit box, it’s not easy to get in unless you have both keys. The access to the wallets is where the risk is, and there’s no recourse. So, the importance is we’re protecting you. You have to know the parties on both sides. You may know one party, but can you validate the other with assurance?
Ungerland: I don’t disagree. Right now in this space consumers have two options. They can use an online exchange or a distributed software wallet or a hardware wallet, and if lose that, you lose all crypto. I’m a big believer that in the future there is going to be a wealth of opportunity for local financial institutions.
Grilli: Can you share your takeaways?
Reed: I think that when you understand something complex and are able to understand something in simple way, you truly understand. As credit unions and CUSOs, educate yourself. Understand what’s happening at your own credit union with what your members are doing. Pay attention. It’s not just the bright shiny object that is crypto.
Wingate: Be intentional and educate. Lean on people who have the ability to break it down and provide meaning to you. That’s how you get into it successfully.
Ainsworth: I hear credit unions say, ‘My members aren’t asking for it.’ They aren’t going to ask you. You are going to see it in their behavior. We talk about inclusion—that demographic is the most active in this space.
Ungerland: My eight-year-old son has no money in the credit union. All his money is in crypto. You want to know who you should be serving? You need to be serving him, those people holding capital outside your institution.
