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Credit unions quietly watch crypto developments.
Canadian credit unions are sitting on the sidelines waiting to see whether cryptocurrencies develop into payment alternatives they need to provide or become investment assets they need to offer. So far, the answer has been no to both options.
But some observers warn that credit unions need to be paying more attention and that senior executives and boards need to learn about the rapidly changing crypto world so they can move quickly to seize innovative opportunities that are coming.
Credit unions are not alone on the sidelines. The big Canadian banks are there too, in part due to regulatory concerns, restrictions and a generally conservative outlook.
It’s been more than 12 years since Bitcoin was first created in January 2009. Early adherents believed it was a payment system that would transform the financial industry by eliminating the need for bank, credit union and government involvement in transactions. But the adoption of Bitcoin, Ethereum and other cryptocurrencies as payment systems has been slow, partly because they are so slow compared to current systems.
But ironically, the bigger restraint on their adoption has been one of the main features their promoters stress—anonymity. It has turned into a double-edged sword, since regulated financial institutions must know their clients as a basic step in guarding against money laundering, tax evasion and financing of terrorism.
This requirement to tell a bank or credit union where its money is coming from has also prevented many companies in the crypto area from getting an account or banking services.
Bitcoin, in particular, has thrived as an investment asset with its bouncing value tracked daily by the media and thousands of investors, some of whom have made a fortune as the price has risen on occasion to $60,000, while others have bought at the top of the rollercoaster ride.
Hash Qureshi, partner at MNP LLP, is a self-described “propeller-head” who has a card on his desk that includes the details for a small fraction of a Bitcoin that was given to him during a company gift exchange years ago. Qureshi says the share’s worth about $1,200 these days and he’s a bit sorry that, in exchange, he only provided a $20 bottle of wine.
So, does he think cryptocurrency is an asset or a payment method?
“It’s both, and because it’s both, we need to think about what rules apply,” he says. “People who want to make a lot of money, they're focusing on stored value. If you're thinking about banks and people that want to do transactions, then you're going to think about it as value exchange.”
Caution in Credit Union Land
The quest to find out what credit unions and their members think about cryptocurrencies and what they are doing in this area led to a lot of unanswered emails or brief, polite suggestions that really the questions should be asked elsewhere, since nothing was going on.
For example, Canadian Credit Union Association, which represents the sector to regulators and politicians across the country, said cryptocurrency hasn’t been a priority and “anything concrete in the credit union sector is probably a long way off at this point.”
That’s why CCUA didn’t prepare a submission in July when the Office of the Superintendent of Financial Institutions, which regulates federal financial institutions, sought industry advice on what the regulatory rules should be for crypto assets. The OSFI review was in tandem with a similar international study by the Basel Committee on Banking Supervision that has suggested that cryptocurrencies such as Bitcoin, which are not backed by another currency or other value, should be treated as more risky assets, while those that are backed will face less rigorous requirements.
Central 1 Credit Union had a similar response to a query, saying only: “Central 1 is not involved with cryptocurrency at this time.”
Even Payments Canada, which seemed a likely source for a position on the topic, begged off and directed any queries to the Bank of Canada.
And the Bank does indeed have views. In June, Deputy Governor Timothy Lane dismissed “this current wave of cryptocurrencies—Bitcoin, Dogecoin, and all those other products—as largely a speculative product right now.”
“I mean, there are obviously a certain number of true believers who think that these will be the money of the future,” he told reporters after a speech. “But then clearly most people who are buying these things are doing it because they think they can make a quick buck.”
That ability to make money when the price jumps or lose it just as quickly is the main reason the Bank doesn’t expect cryptocurrencies to succeed as payments tools, Lane said.
“You’re not going to accept your wages in something that could drop in value by 10% or 50% in the next week or so. So, most people are going to insist on something that’s more stable, that's basically our view of the cryptocurrencies.”
Not surprisingly, the British Columbia credit union regulator has a similar view. “At this time, BC Financial Services Authority views cryptocurrencies as property and not as legal tender,” it said in an email. “While accepting cryptocurrency transactions or working with service providers is a credit union’s business decision, these transactions are not eligible for the deposit guarantee offered by the Credit Union Deposit Insurance Corporation.
“Additionally, crypto-friendly credit unions need to comply with anti-money laundering legislation. We encourage credit unions to put policies in place that allow them to mitigate and manage potential risks associated with the business in cryptocurrencies and service providers.”
Disruption Is Possible
But some experts warn credit unions need to take a broader view of the topic.
Credit unions need to be aware of the dangers to them posed by distributed finance, says Larry Pruss, senior vice president at CUESolutions provider Strategic Resource Management Inc., a Memphis, Tennessee-based consulting company. He warns that “decentralized finance has a real chance of dislodging a lot of traditional financial solutions.”
He notes that the current situation with cryptocurrencies can be clunky for users, and it can be hard for credit unions to see any opportunities for them, but he likens the situation to the internet in the 1990s when we coped with slow, clunky modems and limited services. In coming years, we could see cryptocurrencies and distributed finance become much easier to use and have much bigger players move into the markets. Already, Facebook and Amazon have initiatives on the go that could appeal to millions of customers.
“Crypto is going to provide a lot of solutions, including P2P, where you may not need a financial institution at all,” Pruss says. “So, we're telling our credit unions and community bankers that you need to be aware this is a coming threat, and you need to understand it.”
International remittance payments are another area that could easily be taken over by cryptocurrencies, as they provide a much cheaper way to transmit money safely. On the surface, the world of digital assets may look like a distraction to credit union leaders, but digitally savvy account holders are already diverting bank balances to crypto holdings, and there is an opportunity to earn revenue from custodial services and crypto trading solutions.
Blockchain
The Large Credit Union Coalition, the group of 12 of the largest credit unions in Canada that provides technology and innovation leadership, has examined blockchain, the engine underlying cryptocurrencies, and sees opportunities once the ability to use smart contracts has been ironed out, says Kevin Morris, the group’s strategy and programs director.
A smart contract is self-executing with the terms of the agreement between buyer and seller written into the computer code that exists across a distributed, decentralized blockchain network. The code controls the execution and transactions are trackable and irreversible.
“Governments and financial institutions were surprised at how rapidly these digital tokens took off as a store of value,” Morris says. “Credit unions in Canada focus on maintaining our position as strong, stable, very low-risk financial institutions. We’ve investigated blockchain previously as a tool for distributed ledger technology, which would allow for confirmation of transactions and contracts with less overhead and [lower] transaction costs. We’re also interested in the ‘smart contract’ aspect of programmable cryptocurrency/blockchain, but this technology is still being battle-hardened.”
Central Bank Digital Currency
Morris expects credit unions will stay on the sidelines until the Bank of Canada introduces a digital loonie, a Central Bank Digital Currency that would have the benefits of digital currency but would be backed by the government. In recent months, the Bank has moved ahead with the idea of a CBDC, dropping its suggestion that such a development is years away. Several other countries have already started using CBDCs. Five countries in the Caribbean have fully launched CBDCs, and 14 other countries, including Sweden and Korea, are in a pilot stage for their CBDCs.
A recent report by Bank staff suggested a CBDC could provide competition to the big banks. “A CBDC might be beneficial and probably necessary to ensure a competitive and vibrant digital economy,” it says.
“As a competition tool, a CBDC might be simpler than developing new competition policies in the complex and changing environment of big tech and simpler than attempting enforcement via lengthy and uncertain legal battles.”
At the end of June, the Bank also was given responsibility for supervising new payments systems as part of the overhaul of the payments landscape.
“This new mandate for the Bank is an important responsibility,” said Bank of Canada Governor Tiff Macklem. “The payments ecosystem in Canada and globally is evolving rapidly, with innovative new options and many new participants.”
Qureshi says credit unions have a chance to leapfrog the banks—for one thing, because the banks are still tied to old technology, with some still operating on mainframes—but he fears credit unions need to invest in qualified staff with the necessary skill sets to carry this out. He warns that the tech ability of many credit unions “has been slowly slipping into a coma. Most organizations, if they could, they’d outsource everything to do with their IT,” but you need strong tech to succeed in crypto, he says.
Stay Informed
Annette Bester, partner and national credit union leader at MNP, compares the current crypto debate to the early days of legalized cannabis, when banks wouldn’t touch the companies. Credit unions that saw and understood the possibilities, especially Alterna Savings, were able to step in.
“It's no different—if it aligns with their strategy and they put in the right controls and processes, it could be a great opportunity,” she says.
Qureshi says credit unions need three things to succeed in the crypto world:
- education of management and their boards;
- investment in technology, both the physical infrastructure and the skilled people to run it; and
- the ability to attract clients to let them know what services are available.
“Credit unions are thinking and talking more about blockchain than they are about crypto,” Bester says. “I think they see blockchain as something that would more easily be acceptable within their business. I think crypto is way farther back, but obviously once a credit union is comfortable with blockchain, exploring crypto can build off that comfort.”
A recent blog post by Celero Solutions Inc. suggests changes are coming.
“What’s clear is that we’re only scratching the surface of cryptocurrencies and blockchain technology,” it says. “We envision a future where, eventually, banks and credit unions alike will be building crypto payment rails and widely accepting and participating in the cryptocurrency economy as consumer demand continues to rise.”
Morris of the Large Credit Union Coalition agreed that any move to roll out a CBDC would require technology work similar to the current shift to real-time payments, which has mobilized staff across the system.
What the new banking world eventually looks like could be surprising, some experts say.
Qureshi says cryptocurrencies may change the economic fabric of the internet and create new capabilities that “I don’t think we've even begun to contemplate, and that’s the part as an engineer I find really exciting.”
Pruss warns the excitement might be dangerous for credit unions.
“Pretty much anything that traditional banking has done is now being done outside of the banking space, with no intermediaries involved whatsoever, and also outside of regulation,” Pruss says. “The question I have for financial institutions: Is there going to be a need for you? I don't know the answer to that. Maybe they better figure that out themselves.” cues icon
Based in Campbellford, Ontario, Art Chamberlain has written about credit unions for more than a decade and has been a member for more than 30 years.
