Bitcoin, a new digital currency utilizing blockchain payment technology, first hit the open market eight years ago in 2009. But many still overlook the fact that blockchain technology has far more applications than meet the eye.
The ability to manage data “blocks” and “chain” them together through a distributed ledger, without the need of an administrator, all while providing transparency and security is appealing to disruptors in the payments, insurance, and identity industries.
Nevertheless, you can’t talk about blockchain without bitcoin.
Bitcoin is to blockchain as “Kleenex” is to facial tissues, and for good reason. Bitcoin was the first successful application of the underlying blockchain technology concept.
And now, some credit unions are starting to wonder if they should get into the bitcoin business, too. While it may seem promising, there are five reasons credit unions should proceed with caution:
1. Volatility. Bitcoin had a meteoric rise in valuation and is now hovering around $2,000 per bitcoin. But the digital currency can be quite volatile, according to Coindesk.
By accepting bitcoin as payment, institutions take on the market volatility risk that when plotted on a graph looks more like a thrill ride than a steady investment.
2. Data breaches. Even digital currency needs to be stored somewhere. More than likely you’d need to store your bitcoin at an exchange or trading platform where 33% have been breached at one point or another, Reuters reports.
While a different kind of breach, one bitcoin miner is still kicking himself for accidently throwing out his hard drive with 1,400 bitcoin on it, which at the time were worth a measly $25 but now are now valued at upwards of $3 million.
3. Reputation. Given the anonymity bitcoin provides, it is difficult to know how much of the more than 250,000 bitcoin transactions per day are linked to nefarious activity.
Opening the door to bitcoin could invite unwanted associations or transactions into your credit union business.
4. Compliance and regulation. While still unregulated for the most part, nobody knows exactly what will happen, meaning any change possible could happen in the blink of an eye.
5. Foreign currency handling. Would your credit union accept Deutschmarks or Pesos?
Most credit unions are not interested in being a currency or commodity exchange, but that is essentially the business of bitcoin. So, if that’s the case, then bitcoin might not be for your credit union either.
While your credit union may have members who are excited to use or are already using bitcoin, allowing for transactions to take place in the form of bitcoin at the credit union is an entirely different situation.
Bitcoin isn’t the only blockchain payment technology in town. Many disruptors and established financial institutions are testing their own versions of the technology.
The big difference is that most are looking at closed-loop environments versus the open source environment that powers bitcoin. While the closed-loop environment adds oversight and opportunity to make interchange for these organizations, it also runs slightly counter to the spirit of its intended structure.
On the credit union side, CULedger—a collaboration between CUNA, the Mountain West Credit Union Association, Best Innovation Group, and other credit union system partners—is leading the way piloting several use cases, including a credit union-only payment application.
As an industry, we’re still likely a few years away before we see different applications of blockchain technology take hold.
However, as a leader providing oversight for your credit union’s strategic decisions, it’s important to stay current with blockchain and bitcoin updates, including the risks, to not be left in their wake.