Connecting via crypto

More institutions are venturing into this arena with a focus on future learning and member engagement.

August 26, 2022

Bitcoin remains a divisive topic. Its proponents herald it as the future of money and finance while detractors smell a worthless scam. Both camps have had opportunities to crow over the past year.

Between these poles, however, dozens of established firms and countless startups continue to invest billions of dollars to explore and refine use cases for cryptocurrency and its underlying technology. Meanwhile, consumers have endured dramatic price swings while adopting digital assets in growing numbers.

According to President Joe Biden’s executive order on the responsible development of digital assets, one in six Americans have owned or engaged with cryptocurrency in some fashion—a conservative estimate. Multiple studies further indicate a broad majority of Americans would prefer to manage these activities through their financial institution.

In December 2021, NCUA reiterated its position that federally insured credit unions have existing authority to partner with third parties to enable members to buy, sell, and hold uninsured digital assets. This “clarifying letter” seemed to resolve a bottleneck constraining several in-flight initiatives. 

In mid-January, $3.5 billion asset UNIFY Financial Credit Union in Allen, Texas, partnered with NYDIG to launch buy/sell/hold bitcoin capabilities. Visions Federal Credit Union in Endicott, N.Y., followed suit later that month. As of July 31, at least 10 credit unions had entered the market with similar offerings.

Conversations with leaders in the space reveal several common themes: They remain undeterred by recent market volatility, have experienced consistent member behavior, and are motivated by opportunities for technology learning and member relevance rather than near-term revenue potential.

Meeting demand 

Another common thread across these early movers is recognition that members are already engaged in cryptocurrency. In announcing the June launch of its service, $3.6 billion asset Stanford Federal Credit Union in Palo Alto, Calif., noted it had documented 26,000 transactions to and from crypto exchanges by its members during 2021.

Outflows to these exchanges by Visions Federal members slowed following the January introduction of its service, although Cynthia Schroeder, senior vice president of digital assets at the $5.3 billion asset credit union, is reluctant to read too much into the correlation as bitcoin’s price decline may have also contributed to the lower volumes.

Along with fellow leaders UNIFY Financial and $7.3 billion asset Idaho Central Credit Union in Pocatello, Visions Federal had essentially completed its implementation by last October but deferred a full rollout until January 2022. 

In the interim, NCUA issued a letter clarifying that federally insured credit unions had existing authority to “establish relationships with third-party providers that offer digital asset services… allowing members to buy, sell, and hold uninsured digital assets with the third-party provider.”

Although no new authority was delineated, this added comfort seemed to facilitate a wave of early 2022 launches. And although a few community banks have entered the market as well, credit unions are setting the pace—perhaps because statements from the Office of the Comptroller of the Currency and FDIC have been more equivocal.

NEXT: Avenues for engagement

Avenues for engagement

Rahm McDaniel is the head of banking solutions at NYDIG, the third-party custodian partnered with each of the first wave of credit union adopters. He sees two common threads among the early movers. 

“They tend to be progressive in offering innovation to their members and conscious of member demand through researching the withdrawals going to crypto exchanges,” he says.

As an industry evangelist, McDaniel understands that his word only goes so far. “I can say it, but it’s entirely different for credit unions to do their own analysis.”

Credit unions’ focus on collaboration helped establish an early advantage in rollouts relative to banks. UNIFY Financial CEO Gordon Howe has been particularly forthcoming with data based on nearly five months in market. 

Over this time UNIFY Financial has enrolled more than 8,000 members in its crypto offering despite minimal promotion. Additionally, “11% or 12% of our users came from an indirect or wholesale relationship,” says Howe, drawing a distinction from UNIFY Financial’s core member base. 

Although too early to draw firm conclusions, this statistic is particularly intriguing to leaders like Schroeder who have long sought effective avenues to engage indirect members.

Howe has expressed interest in expanding his offering to a few widely held options beyond bitcoin, which at present remains the only digital asset NYDIG supports.

“Our slogan is ‘bitcoin for all.’ We clearly believe bitcoin has intrinsic aspects that make it attractive for people who fit well in a traditional banking environment,” McDaniel explains. “That said, there’s clearly demand for some other coins. We also believe compliance is absolutely required for innovation in banking, and right now we have sufficient clarity to move forward with one asset: bitcoin. When there’s greater clarity, putting additional assets in our platform won’t be difficult.”

  Oklahoma’s Credit Union

Oklahoma’s Credit Union advertises its crypto services on a bus shelter.

Bloodied but unbowed 

Given 2022 market trends, it’s a near certainty that members who have bought bitcoin through their credit union are currently in a loss position. This unfortunate timing hasn’t affected credit unions’ resolve, however. In fact, many express surprise at the lack of member blowback.

“They’re still coming on despite the price declines; they’re not flocking out,” Howe observes. “Those selling off would then come back and buy again. People have their own thresholds.”

This may be due in part to the demographics of the credit union crypto cohort, which so far has been consistent across institutions. The average age of an enrollee sits in the mid-40s, below the credit union member median but well above the average for those on nonfinancial institution crypto exchanges. 

“We thought it would be younger—I guess it ties to the trust factor,” Schroeder speculates. 

Average purchases have been in the $250 to $300 range, not exactly “bet the farm” transaction sizes. 

Executives say a handful of members expressed displeasure with their credit unions’ crypto forays, although most are opposed on principle rather than those engaged in crypto. In response, leaders point out that the credit union isn’t placed at financial risk and that custody resides with the third-party partner.

Credit unions have taken active measures to avoid appearing to recommend crypto as opposed to making it available alongside a broad suite of products. Case in point: NYDIG has funded a cooperative promotion adding $5 of bitcoin to a member’s first purchase. Although Visions Federal members still receive the bonus, the credit union elected to disclose the offer only after the member decides to enroll. 

“We ran an article in our member financial magazine, but otherwise it’s been word of mouth,” she says. 

A “buy/sell bitcoin” option simply appeared without fanfare on their digital banking menu and was discovered by more members than expected. They were able to review and sign disclosures online and be passed seamlessly to the third-party partner’s site. 

Perhaps the most visible form of promotion has been Oklahoma’s Credit Union’s bus shelter signage with a QR code and the statement “Bitcoin Made Easy.”

NEXT: A role for small credit unions

A role for small credit unions 

Members of small credit unions are buying crypto, too, says Becky Reed, CEO at $140 million asset Lone Star Credit Union in Dallas. “I challenge credit unions to look at their data. I think you’ll find 25% to 40% are buying crypto.”

Reed believes smaller credit unions are seeking a simpler solution. Toward this end, Reed partnered with fintech BankSocial for an alternative model that Lone Star debuted in early August.

The LoneStar/BankSocial offering is link-based rather than integrated into digital banking, streamlining the implementation process. 

The member experience is credit union-branded and wallet-based rather than custodial.

In other words, the member continues to hold the private keys to their crypto, not BankSocial. “Most credit unions want no part of being a custodian at this point,” Reed says.

The partners plan to offer their solution to other credit unions, perhaps through a credit union service organization.

With $740 million in assets, Oklahoma’s Credit Union in Oklahoma City was one of the few credit unions with less than $1 billion in assets to provide crypto services upon its April launch. 

“One of our strategic initiatives is to be a fast follower in digital so we remain relevant to our members,” explains Chief Experience Officer Jennifer Lown. “We were able to see from simple queries that our members were active in crypto.

“We’re big believers that the digital space is the great equalizer” for smaller institutions, she continues, aiming to prove that “small credit unions can participate if they engage with the right partners. We’ve been vocal with partners about our desire to be early adopters and beta testers.” 

The credit union learned of the crypto opportunity through Q2, its digital banking provider. 

“Eighteen months ago we began thinking about how we could help our financial institution customers get started in offering crypto investments,” says Johnny Ola, managing director of Q2’s Solutions Studio, the innovation hub through which ecosystem players integrate their functionality into Q2’s digital banking platform.

“At this point, consumers would rather deal with crypto through their financial institution through a secure portal they already trust,” he adds.

Credit unions confirm the rollout process takes six to eight weeks, “not a traditional heavy implementation lift,” as Ola puts it. 

A busy road ahead 

Other providers are entering the fray as well. 

CryptoFi has completed some digital banking integrations, and also offers support for roughly 50 popular digital coins beyond bitcoin. Unifimoney goes a step further, enabling additional digital assets as well. 

The “crypto winter” that has sliced the aggregate value of digital coins from nearly $3 trillion to less than $1 trillion doesn’t appear to have slowed the rollout of financial institution offerings, which several experts estimate will number in the hundreds in a year’s time. 

The early adopters clearly see this as a long-term play, and are undeterred by a six-month price fluctuation. Bear in mind, bitcoin’s price had already dropped by half once before since their crypto initiatives began.

“We’re definitely moving forward,” Schroeder affirms. “Our interest is with the underlying technology of digital assets, not just crypto. We believe that’s where the operational efficiencies are.”

A recent NCUA letter clarifying credit unions’ authority to pursue distributed ledger technologies provides added comfort in that regard. 

“We didn’t move into this opportunity for near-term revenue, although we put a little into our business case,” Schroeder says. “We did this because we knew our members had interest in it and because we want to be innovative and relevant to our members who are interested.”

Howe also sees further mainstreaming on the horizon. 

“Once we’re able to start paying share dividends and loyalty rewards in bitcoin,” he says, “members will approach it like another share account.”

GLEN SARVADY is managing principal at 154 Advisors.