The cryptocurrency market has recently been in crisis mode, with many exchanges reporting massive declines in asset values and significant liquidity challenges. Crypto investors, including credit union members, have racked up hundreds of million dollars in digital losses.

Although the current state of cryptocurrency and digital assets remains uncertain—largely unregulated with minimal financial institution and government involvement along with extreme volatility—the market is here to stay.

On the supply side, Big Tech and fintech firms such as Apple, PayPal, and Venmo continue to provide crypto offerings for consumers. These firms offer innovative solutions, including digital wallets and mobile payment apps that make it easier for consumers to complete crypto transactions with their smartphones.

On the demand side, consumers increasingly prefer digital products, continuing a trend accelerated by the pandemic. 

Cryptocurrency matters for credit unions because even in a more regulated, consumer-friendly form, digital assets such as stablecoins and retail digital currencies represent an existential threat to credit unions’ deposit funding.

Widespread adoption of privately issued digital assets will likely threaten the Federal Reserve’s ability to effectively implement monetary policy and will continue to conceal a wide range of unlawful activities.

Digital assets describe the universe of tokenized assets that don’t rely on a central bank or a third-party institution to authenticate their value or their transference, according to The Economist.

Conceptually, there are three types of digital assets, which are often viewed as one because of their technological and functional similarities. But they differ by the nature of the organization of origin from privately issued crypto assets to publicly issued central bank digital currencies (CBDCs). They also present structural and design differences, which makes it vital to consider each individually when evaluating potential use cases and needed regulation.

Cryptocurrencies are characterized as being tokenized and not account-based, and are built on decentralized ledger technologies, such as blockchain. Like physical tokens used in gaming arcades, cryptocurrencies are a form of digital tokens consumers can purchase with traditional currencies and use for specific purposes.

Blockchain is a database that isn’t stored or centralized in a single computer. Its data is distributed across many computer nodes, each with a copy of the entire database. The decentralized nature of blockchains guarantees the fidelity and security of the data without the need for a trusted third-party verifier.

Bitcoin was the first cryptocurrency introduced to the market in 2009 as a peer-to peer payment system. But it hasn’t been widely adopted as a means of payment due to its extremely high price volatility. Instead, it’s mostly used as a speculative asset. 

Cryptocurrencies such as bitcoin are classified as commodities under the Commodity Exchange Act. As such, their prices are set by supply and demand.

Stablecoins are cryptocurrencies introduced to address the risks of high price volatility associated with other crypto coins. Stablecoins peg their value to an asset or a group of assets for stability.

Most outstanding stablecoins are pegged to the U.S. dollar, and they are mainly used to facilitate trading, lending, or borrowing of other digital assets through digital trading platforms. 

CBDCs are digital assets issued by a central bank as a digital form of fiat money. Like cryptocurrency and stablecoins, CBDCs are tokenized and can be exchanged in a decentralized manner.

CBDCs are divided into wholesale or retail assets. A wholesale CBDC is a central bank-issued digital token intended to be used by financial institutions for cross-border and interbank payments. Consumers use retail CBDCs for retail transactions.

Crypto proponents say cryptocurrencies, and digital assets in general, have multiple advantages compared to traditional payment vehicles:

• Crypto transactions are easier to make as they require only a smartphone app.
• The security of crypto transactions is said to be guaranteed by encryption and by the decentralized nature of blockchains.
• Crypto users can set up digital platform accounts in anonymity for an extra level of privacy.

Widespread adoption of digital currencies in their current iteration would pose risks to consumers, financial intermediaries, and governments, including central banks. Speculative trading in digital assets presents market integrity risks such as fraud, market manipulation, insider trading, and front running.

The increasing adoption of stablecoins or retail CBDCs risks disintermediation of financial institutions, including credit unions. An extreme scenario in which we see significant consumer adoption of digital assets as their primary store of value or medium of exchange could disincentivize consumers from holding their savings in depository institutions. As a result, credit unions could see a significant reduction in their source of funding.

Digital currency platforms also offer products and services outside the scope of regulation, which leaves consumers unprotected and exposes credit unions to unfair competition through regulatory arbitrage.

Widespread adoption of private cryptocurrencies and stablecoins would challenge the Federal Reserve’s control of the monetary base. That means the central bank would not be able to effectively use monetary policy to impact real economic outcomes.

NEXT: Cryptocurrency market