In December 2021, the National Credit Union Association (NCUA) published the letter, “Relationships with Third Parties that Provide Services Related to Digital Assets,” outlining a way in which credit unions can work with third parties to provide digital asset services to their members. To date, this has provided credit unions with the ability to offer digital asset services that their bank counterparts can not.
“Digital assets” is the broad term used for cryptocurrencies like Bitcoin, non-fungible tokens (NFTs), and blockchain-based smart contracts. Potential services provided by credit unions may include the buying and selling of digital assets; transfer, custody, or use of smart contracts to secure a loan or agreement.
Custody is the most important of the potential services listed above because it is required by the other service offerings. Custody is the protective care or guardianship of digital assets on behalf of a member. How credit unions offer custody now and in the future will have long-term consequences.
Off-Balance Sheet Custody
As stated previously, the NCUA currently allows credit unions to work with third parties to provide digital asset services. In terms of custody, this means that a credit union may not hold Bitcoin or other digital assets on behalf of its members. To offer custody, a credit union will need to use a regulated third party provider.
When determining a third party provider to assist with your custody offering, it is important to think of the long-term decisions you are making for the credit union. Is the custody provider regulated? Are the assets stored one-to-one or leveraged out? Can you migrate stored digital assets from the custody provider to another in the future?
While digital assets as an offering in credit unions is still new, it is important to make sure that the offering creates value for the credit union now and in the future. In three to five years, digital assets may not only be able to be custodied on-balance sheet by the credit union but even leveraged out, similar to fiat deposit accounts.
On-Balance Sheet Custody
On-balance sheet custody is the holding of a member’s digital assets directly by the credit union itself. The credit union can still use a third party to provide the technology and infrastructure to custody the digital assets, but the regulation and responsibility of those digital assets now fall on the credit union.
This may seem like a daunting challenge for many, but it is best to think of this offering as very similar to traditional fiat deposits. Having control of custody allows the credit union to leverage the digital assets in personal and commercial loans. Digital assets can also be used as a second form of liquid collateral for members securing a loan.
With the NCUA having a progressive approach to digital assets, it is not an unlikely thought for credit unions to custody and loan digital assets in the next couple of years. The following use cases highlight the new offerings a credit union can provide its members when a strong custody framework for digital assets has been established.
Use Cases for Digital Asset Custody
Offering digital asset custody not only provides a new digital service to your members, but it builds a long-term foundation for additional digital services.
Members today are buying Bitcoin and other similar digital assets as a store of value or speculative investment. While they can custody those assets in their own wallets, many may not want the responsibility of holding those assets long term in the event they misplace their wallets’ private keys. The ease-of-use and assistance in securely storing digital assets with a financial institution is favorable in similar terms to fiat in a checking or savings account.
Now think about the physical assets your members store in a safe deposit box. Non-fungible tokens, or NFTs, are bridging the gap between physical and digital assets by providing a digital record of ownership, authenticity, or history of a physical asset. Providing a vault to store these digital assets can provide the same piece-of-mind protection for members as the traditional safe deposit box does. It can also, as stated earlier, provide a mechanism for members to utilize and leverage the value of these digital assets in other products offered by the credit union.
But the most exciting use cases for digital asset custody have yet to be realized. Technology, still young, has presented the building blocks for products and services yet to be realized by our minds. A fully digital asset and the management of those assets unlocks new possibilities not available to physical and paper-based assets.
The Future for Credit Unions
Innovation and collaboration are key to unlocking these offerings within the credit union. A progressive approach with the NCUA, a collaborative and credit union-friendly approach with financial technology providers, and a long-term roadmap can establish the credit union’s success as it moves into its digital future. Since 1909, credit unions in the United States have provided their members with a trusted store of their wealth, and that will continue into the digital age.
Need help in building a digital asset custody offering for your credit union? Contact Justin Seidl and his team at Sequoir for crypto expertise.