Ignore cryptocurrency at your peril
Focus on opportunities to counter the long-term market share challenges of disruptors like PayPal.
It’s easy to become mesmerized by the wild swings in cryptocurrency valuations. In the first half of this year alone Bitcoin’s price doubled, reaching an all-time high of $62,000 before suffering a nearly 45% drop within a two-week period in May.
Through all the volatility Bitcoin remained up 13% at the halfway point of 2021—an impressive return by traditional investment standards but hardly a calming trajectory.
Although these gyrations can make for great sport, they don’t change the premise underlying credit unions’ potential role in cryptocurrencies.
The most substantive recent development on this front was PayPal’s late 2020 integration of Bitcoin and Ethereum into its standard wallet app, enabling consumers to buy, sell, and, more importantly, pay for certain retail purchases at checkout with existing crypto holdings.
The company also touts the same fraud protections as for other purchases, essentially placing them on parity with the U.S. dollar. More recently, Fiserv announced a partnership with NYDIG that will enable buying, selling, and holding of bitcoin through financial institution accounts.
The biggest hurdles facing crypto have been mass market acceptance and the ability to use holdings seamlessly as a means of exchange. Let’s face it: to date, virtually all of crypto’s traction has been based on its hype as a speculative asset rather than a functional currency.
For this reason, PayPal’s move (and to a lesser extent, Fiserv’s) may prove to be a watershed event. PayPal’s website actively positions its functionality as a safe way to “discover crypto for as little as $1.”
Given its large installed base and claim of “millions of online stores” ready to accept Bitcoin, PayPal has made significant inroads in addressing those hurdles.
On the other hand, the site warns that “checking out with crypto is a taxable transaction” that requires a signed W-9 tax form before the feature is enabled, so some friction remains.
Another intriguing recent development was El Salvador’s decision to accept Bitcoin as legal tender, essentially positioning it in parallel with the U.S. dollar (the country effectively retired its own sovereign currency in 2001).
Complications quickly arose with what appears to have been a hastily announced and ill-defined plan. Nonetheless, if implemented properly an economy like El Salvador’s aligns nicely with crypto’s potential benefits: a largely unbanked population with limited access to traditional services and high reliance on cross-border inflows from expatriates.
If not El Salvador, another nation with similar dynamics may soon serve as a real-world laboratory to prove crypto’s potential as a functional currency.
Member interest grows
What does this mean for credit unions? Although broad adoption likely remains a few years out, a growing number of your members are demonstrating interest in cryptocurrencies like Bitcoin.
They’re increasingly likely to ask about your capabilities or advice in the area. The lack of an informed answer could jeopardize credit unions’ “trusted partner” status.
Moreover, members may decide to hold greater balances on account with PayPal or similar providers enabling crypto transactions—hardly asset migration credit unions want to encourage.
Regulators are increasingly willing to allow credit unions to provide custody services for crypto assets. Though not without risk—if the volatile assets cause member losses, members may associate the credit union with an unpleasant experience—it’s a logical and incremental first step into the crypto arena.
Central bank digital currencies (CBDC) will likely be another catalyst for digital assets in the traditional financial services sector. The Federal Reserve is collaborating with MIT on such solutions.
We’ll have more detail on this as well as the related field of decentralized finance (DeFi) in future posts.
For now, credit unions should tune out the noise of daily price swings and focus on opportunities to counter the long-term market share challenges of disruptors like PayPal.
GLEN SARVADY is managing partner at 154Advisors.