By Ray Birch
KALAMAZOO, Mich.—It's probably too soon for credit unions to get involved in cryptocurrency, according to one compliance attorney, who says it’s best to let NCUA do the “heavy lifting” first before cooperatives put their toes into the digital currency market.
But credit unions also shouldn’t delay their preparedness, according to Angela Gamalski, associate at legal firm Honigman, LLP, who is forecasting the wait won’t be that long and that cryptocurrency will be becoming more mainstream in a year.
As CUToday.info has reported, at least one credit union has moved to work with cryptocurrency. In addition, the American Bankers’ Association (ABA) has issued a new report that suggests banks should consider partnerships with crypto firms based on the increased profitability of the sector and client interest.
Input Being Sought
NCUA, including all three of its board members, have repeatedly spoken to wanting to stay on top of developments in crypto, with Gamalski pointing to a request for comment the has published in the Federal Register regarding CU digital assets and technologies. She urged credit unions to not only become familiar with what NCUA states in the notice, but also to provide feedback.
The agency recently extended the comment period through the end of October.
“Risk and compliance management is the dominant topic in the NCUA notice and comment. NCUA repeatedly uses the word ‘unique’ with regard to compliance concerns,” stated Gamalski. “That suggests the best course of action may be to take a wait-and-see approach with these new technologies. I would want NCUA to do some of the risk analysis for me, and follow what the regulator is saying. Let them do the heavy lifting and figure out where the guideposts are.”
There are many questions to be answered for credit unions when it comes to the crypto market, Gamalski said.
“I think for credit unions the big challenge now with cryptocurrency is you still need to work with an “intermediary to provide cryptocurrency services to members,” she explained. “There’s a lot of different players in the space right now, and figuring out who you are going to partner with to handle the cryptocurrency conversion process is a big concern.”
Major Worries
The major worries with third-parties, said Gamalski, are that intermediaries are actually providing the access to the markets and exchanges where the cryptocurrency is being used. Gamalski added that many of these intermediaries are new and have only started following BSA and AML rules relatively recently.
“Credit unions know the penalties here and what to do, as they have been following these BSA and AML rules for many years,” Gamalski said. “NCUA, in its notice for comment, included one question about due diligence of vendors in this space, which is the true minefield. OFAC (Office of Foreign Assets Control) has issued several recent sanctions against digital wallet services, which are often used to hold cryptocurrency, for failing to avoid prohibited transactions.”
Unrealized ‘Pitfalls’
What the credit union must work diligently to do, emphasized Gamalski, is make sure members are protected.
“There are a lot of questions that you have to ask yourself to really figure out what you are doing and where you are going in the space, because there are so many different directions and so many opportunities…,” she said. “The immediate challenge is to make sure you are not putting your members in a position where they're working with an entity that they really don't want to be working with. I believe most of the pitfalls out there may not have been realized yet.”
Gamalski emphasized again how one of credit unions’ top concerns has always been compliance, and that compliance typically claims the highest percentage of administrative spend.
“Credit unions are always watching for BSA and AML issues,” said Gamalski. “Not only is there concern over a third party not being as vigilant as credit unions, there is also reputational concern for the cooperative. I just think that right now it is too soon for credit unions to get involved in cryptocurrency.”
Credit unions, too, will not only have to choose a third-party partner, but also the types of cryptocurrency they will support.
“And there are so many today to consider,” Gamalski reminded.