Once the mysterious realm of tech-savvy innovators and early adopters, cryptocurrency is now a rising economic force that credit unions cannot ignore. Changing regulations and growing consumer interest reflect an increasing acceptance of cryptocurrency. These factors make it wise for credit unions to understand the pros and cons of cryptocurrency and learn how to free up resources should they decide to invest in crypto capabilities.
What is cryptocurrency?
Merriam-Webster defines cryptocurrency as any form of currency that only exists digitally. It records transactions and manages new units with a decentralized system that encrypts data in separate sections (blockchain cryptography) to secure transactions.
The first, and still most widely known, cryptocurrency is Bitcoin, but since its release in 2009, thousands of other currencies are now on the market. According to a recent survey, the five most popular cryptocurrencies by percentage of investors are:
- Bitcoin 66.70%
- Dogecoin 28.60%
- Ethereum 23.90%
- Litecoin 19.00%
- Binance Coin 13.80%
Cryptocurrencies don’t have a central issuing or regulating authority, nor do they rely on banks to verify transactions. This allows them, at least theoretically, to exist outside the control of governments and banking systems.
Originally, crypto was available only by “mining.” That is, by providing computational power that triggers the release of new electronic coins into circulation. Thanks to the many exchange platforms flourishing in recent years, interested investors can now buy and sell crypto as easily as they can buy and sell traditional stocks.
Credit union relevance
Cryptocurrency is steadily becoming more popular with consumers, both as an investment and payment method. The number of Americans owning cryptocurrency increased 61% from 2019 to 2021. Crypto exchanges allow people without specific tech skills to buy, sell or hold crypto, much like any other investment. Innovations such as crypto debit cards and PayPal’s wallet app make it easier to use cryptocurrency to pay for everyday purchases.
Even governments are getting in on crypto. Around the world, countries from China to Nigeria to Sweden are experimenting with national cryptocurrencies, known as central bank digital currencies (CBDCs). The European Union and the United States are studying the pros and cons of CBDCs, but both may release a form of digital currency in the future.
Meanwhile, large banks in the U.S. and some smaller ones now offer cryptocurrency services. In December 2021, the National Credit Union Administration (NCUA) clarified that credit unions could partner with third-party services to provide crypto opportunities to customers. In 2022, UNIFY Financial Credit Union became the first credit union to announce cryptocurrency services for its members.
According to a recent report, 25% of credit unions plan to offer crypto services to their members within the next two years.
Potential roadblocks and resources for cryptocurrency
Cryptocurrency may have potential, but it’s essential to be aware of the potential barriers for credit unions and their members alike.
While the NCUA’s clarification that credit unions can partner with crypto service providers is welcome, the sector remains largely unregulated, leaving financial institutions to guess what the future holds. The current lack of regulation makes crypto a target for theft and scams; on the other hand, over-regulation might hamper widespread adoption.
Crypto remains highly speculative, and most consumers do not understand it well. Moreover, it can be associated with criminal activity and widely publicized incidents of large-scale theft, making customers understandably skittish.
The unknown unknowns
Crypto is part of a swiftly evolving technology in an unpredictable world. It remains to be seen how and if cryptocurrency will be affected by new uses for blockchain, geopolitical events and technological innovations.
How credit unions can overcome crypto obstacles
Initially resistant to crypto, many traditional financial institutions now recognize cryptocurrency’s potential. They are jumping into the market, educating customers and offering them easy ways to buy, sell and trade various digital currencies.
Until recently, credit unions were more cautious than for-profit banks and brokerages, but the NCUA is paving the way for credit unions to compete in a crypto world. NCUA Vice Chairman Kyle S. Hauptman recognizes the need to help credit unions stay competitive. He likens cryptocurrency’s disruptive potential to the internet, declaring, “Standing still can be riskier than experimenting with new ways of doing things,” and promises support for new initiatives.
“Credit unions have been watching endless outflows of cash to crypto exchanges, and many people would rather use their primary financial institution for their first foray into crypto investing,” Hauptman recently told CoinDesk. “[The] guidance helps both concerns and gives a new revenue stream to credit unions [that] want to try it out. Financial services has always been ‘adapt or die’ and I don’t want credit unions to go the way of Blockbuster Video because we, the regulators, prevented innovation.”
UNIFY, the first credit union to offer cryptocurrency trading services, partnered with crypto trading platform NYDIG to provide its members with the ability to buy, sell and hold Bitcoin. It now has 6000 members signed up to the platform and makes around 5,500 trades each month. With each transaction worth a 2% fee, Unify has a new and potentially important revenue source.
Another early adopter, Idaho Central Credit Union recently launched a Bitcoin offering through its mobile app. The credit union describes the offering as, “the ability to buy, hold, sell, and manage bitcoin alongside traditional accounts via a secure, regulated, modular platform.”
Pros and cons of a cryptocurrency strategy
As with any new undertaking, credit unions must weigh the potential risks and rewards of cryptocurrency.
- A crypto strategy allows credit unions to stay current as crypto becomes more widely adopted by consumers and retailers alike.
- Offering crypto services will help credit unions stay competitive with banks and other credit unions.
- Cryptocurrency represents a promising new source of revenue for credit unions.
- Crypto provides an opportunity to serve members by offering them services they want through an institution they trust; 45% of credit union members would prefer to have all their financial services with a single institution.
- Most customers need more education and confidence before investing in crypto.
- Unlike traditional credit union or brokerage accounts, crypto accounts have no government-backed protection against theft or fraud.
- Crypto remains a highly volatile environment.
- Requires financial resources to initiate a meaningful investment.
How to free up funds for digital innovation
Offering crypto services to members may be the wave of the future. Still, it will require financial investment to create new platforms, educate members and market new services.
Most people who hold Bitcoin (81%) would like to move it to their financial institution if they knew it offered secure storage. The demand is there. However, it can be difficult to find the resources to make it happen. Credit unions looking for paths to fund digital initiatives can find it in an unlikely place — their benefits plans.
We’ve found that making changes to how the credit union funds its employee benefits program can save credit unions up to 30% in the first year alone.
By properly positioning the benefits funding model, where the credit union only pays for the healthcare its employees actually use, instead of paying a monthly premium in advance of health services being rendered, avoids overpaying for benefits. One such model is referred to as self-funding or self-insurance, where an employer establishes a company- and employee-funded trust to pay for employee healthcare claims as needed.
Self-insured health plans allow credit unions to save on taxes, fees, administrative costs and insurer profit margins, earn interest on money set aside for health coverage, and even keep the difference if claims are lower than expected. To protect the credit union from catastrophic, large claims, an insurance policy is purchased to cover all large claims. If set up properly, this approach creates a “no downside” opportunity for credit unions.
According to our experience, credit unions can save $225,000 in health costs for every 100 employees under a self-insured model. Such savings can help put a credit union well on its way to providing members with new opportunities to invest in crypto capabilities.
Want to know more? Schedule a free consultation to learn more about potential savings. Those savings can go a long way toward funding digital initiatives such as developing a cryptocurrency strategy.