Cryptocurrency, blockchain, and the digital future

For better or worse, every credit union leader has an opinion about cryptocurrency. Last year was certainly a wild ride for the crypto market, and the collapse of FTX in the fall was extremely damaging to public perception. Where is this market headed?

Over the last few years, some credit unions began offering members access to bitcoin as an investment. This was a reasonable decision based on the data showing outflows as members transferred funds to crypto exchanges, especially during the crypto bull market during COVID.

From what I’ve seen, every case has been a self-directed investment account separate from wealth management. Again, this makes sense given the vendor and regulatory constraints around financial advice related to digital assets.

It’s no surprise that this trend of digital assets for members lost momentum in 2022 and will take time to recover. I hope that when it does there will be more discussions about how this service relates to members’ overall financial goals and financial well-being.

As I’ve met with credit union leaders this year, I’ve shifted the focus around cryptocurrency and blockchain toward use cases other than investing. This ecosystem is ultimately about emerging technology, which should inspire leaders to think about how their credit unions can harness the power of this technology to serve members.

Ultimately, the discussion is about digital transformation and the ongoing transition from paper-based to electronic systems. Digital transformation is much more than just scanning documents or entering numbers in a spreadsheet.

One of the potential use cases on the horizon is in payments. We’ve been transitioning away from physical cash for some time, and COVID accelerated the transition to contactless payments.

However, a cashless society still relies on the heavily intermediated card network system that predates the internet. Merchants around the country are beginning to pass through a 3% transaction fee to consumers that could lead to greater interest in alternatives.

What most have forgotten is that cryptocurrency was designed to be digital cash that can be transferred anywhere quickly and cheaply on a public blockchain. In other words, crypto is the digitization of cash that offers an alternative to cashless card networks.

The use of stablecoins on open blockchain networks will likely grow in adoption as a way to transfer the value of a dollar on a more efficient payment rail.

Another potential use case is in traditional lending. Loans on credit union balance sheets are already “digital assets” because they don’t exist in physical form. Today, we use relatively old technology to record loans as data on separate data management systems.

Transferring data across these systems for purposes like indirect auto lending and loan sales can be quite difficult.

The large number of pain points in this type of process suggest a need for a distributed ledger to share information across the network of participants.

A nonfungible token (NFT) is the technology we should explore for recording the data associated with a unique asset like a car loan. For instance, if credit unions can begin to buy and sell loans as NFTs, the information about the borrower, the asset, and the loan terms can all be embedded in the token.

Streamlining this data-sharing process is precisely what blockchain was designed to do.

As credit union leaders think strategically about the future, I encourage them to look ahead to this digitization of money and assets. We all know that the next generation of consumers is digitally savvy and looking for both a high-touch and high-tech experience.

This isn’t just about having a banking app with good user experience. It’s about revisiting the way we do back-end data structures so all the information can be moved around more efficiently.

Cryptocurrency and blockchain can help credit unions do this differently in the future.

LAMONT BLACK is assistant professor at DePaul University.