Discussion Highlights Transactions, Services and Members

L-R: Lamont Black, finance professor at DePaul University, and Jeremy McLaughlin, partner of K&L Gates law firm and member of the payments, bank regulatory and consumer financial services division
L-R: Lamont Black, finance professor at DePaul University, and Jeremy McLaughlin, partner of K&L Gates law firm and member of the payments, bank regulatory and consumer financial services division

Two cryptocurrency experts recently presented to a group of California and Nevada credit union CEOs on how “cryptos” work, what it means for the financial services industry, and how this digital currency and the blockchain-ledger technology underpinning it can play a role in credit unions helping their members.

Lamont Black, finance professor at DePaul University, and Jeremy McLaughlin, partner of K&L Gates law firm and member of the payments, bank regulatory and consumer financial services division, gave a high-level overview of the history and context of current-day application of cryptocurrency, as well as blockchain ledger technology. They also touched on how state, federal and international government regulators and legislators differ in their categorization and oversight of cryptos, digital assets, and money transmissions:

  • Today, the evolution and experimentation in cryptocurrency isn’t about replacing credit unions or banks. It’s about how these two systems coexist, intersect, and work together. Your credit union’s members are increasingly intrigued in cryptocurrency as a “store of value” and for transactional/payment purposes, and many are already using Bitcoin and other cryptos. It’s important to consider what role credit unions can play in this space.
  • Cryptocurrency is proving to be transformative and has incredible potential for credit unions. From storing gold and physical commodities throughout history to using fiat currencies like the U.S. dollar, individuals and countries are realizing the supply of money can be increased quite dramatically and the value of currency can change quickly. Users of Bitcoin and other cryptocurrencies have been increasing in number and operating adjacent to the innovative payment systems transpiring over the past 10 years for fiat currencies that run through credit unions, banks, fintechs and central banks.
  • The continual evolution of cryptocurrencies represents the next step in the global digital payments revolution for financial institutions. The creation and experimentation of Bitcoin (the most valuable of cryptocurrencies measured in U.S. dollars) and other cryptocurrencies is considered unregulated “money” (no central bank authorization) for lending, borrowing, and transacting for purchases over the internet.
  • Credit union leaders are encouraged to learn more about blockchain technology. Blockchain is the distributed ledger technology supporting cryptocurrencies. Financial institutions can find valuable uses for it as a “store of value.” Through blockchain, one party does not know any information about the other party within transactions. However, millions of crypto-software applications maintained by participants around the world confirm the authenticity of each transaction through a blockchain-supported “open ledger” (aka “distributed “ledger”). This system operates with the same level of safety, if not more, as today’s digital, fiat money-payment channels since millions of crypto-blockchain participants are verifying transactions securely and instantaneously.
  • Blockchain, by definition, is the “democratization” of cryptocurrencies — and credit unions and their members can potentially benefit. Blockchain does not rely on central bank/government systems and traditional, legacy third-party recordkeeping systems (also known as “DeFi” or decentralized finance). Instead, blockchain relies on individual users maintaining the entire crypto network as a group, globally. The second-largest crypto by market capitalization, Ethereum, is a blockchain that goes beyond cryptos such as Bitcoin. With Ethereum, users can build smart contracts, create services, and come up with useful applications for others (business partners and/or credit union members). Borrowers can be connected with lenders through blockchain-supported programs that generate lower transaction fees, more beneficial value for both parties involved, and higher returns for lenders.
  • Some of the world’s central banks are experimenting in the cryptocurrency space (CBDC — Central Bank Digital Currency). For instance, the value of a “stablecoin” such as USDC (U.S. Digital Coin or USD Coin) is tied to the value of the U.S. dollar. A stablecoin’s value is purposefully not as volatile as Bitcoin and other cryptos.
  • Regulation of cryptocurrencies is a patchwork of state, federal and international entities, with many viewing cryptos as “digital assets.” Putting federal and international regulators aside, the state level is currently where cryptos are experiencing the most regulatory activity through money-transmission laws or regulations — or both. California and Nevada have their own unique regulatory situation compared to other states. As of mid-2021, 20 U.S. states required a license for financial institutions assisting crypto users. Being regulated mostly comes down to whether a credit union member or bank customer: 1) receives crypto transmissions; 2) issues crypto tokens; 3) sells crypto; or 4) exerts custody or legal control of crypto on behalf of someone else.

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