By Guy A. Messick
Owning digital currencies can be a wild ride. The increase in value can be staggering and the drop in value can be devastating. Despite the high profile losses in digital currency recently, more and more people are buying digital currencies. It is eye opening for a credit union to review the payments of their members to see how many transactions are going to digital currency exchanges.
Mission Driven Reasons
There are strong reasons for credit unions to engage with digital currency and it is primarily mission driven. The mission of credit unions is to help their members manage their financial lives through education and identifying highly qualified and reputable third parties when needed. If a credit union only offers deposits and loans, it is missing the portion of its members’ finances held in mutual funds and, increasingly, in digital currencies.
To fully execute on its mission, credit unions have a duty to help members better understand the opportunities and risks of digital currency trading in order make prudent decisions. If credit unions ignore digital currencies, members are left to fend for themselves.
Relationship with the Digital Currency Exchanges
How would engagement work? By partnering with digital currency companies affiliated with the exchanges, credit unions set up a relationship that mirrors the networking relationships between credit unions and broker/dealers. In investment services, credit unions refer members interested in buying securities products to affiliated broker/dealers and the members execute investment transactions through the broker/dealers.
The credit unions do not have any role in the transactions. Their only role is the referral and, for that, they are paid a fee based on the broker/dealer’s transactions with their members. The credit union’s role would be the same in the digital currency transactions.
Education
To fulfill the credit union’s mission, financial education on buying and holding digital currencies has to be a key element. Members must be able to access information on the Internet that is useful and easy to understand. The information should include the value history of the digital currencies offered on the exchange and links to informative articles.
The information should also include the best practices for buying, holding, and selling digital currencies.
Mitigating Risks for the Members
The safest way to hold digital currencies is for the member to hold them in his or her own digital wallet separate from the exchanges. If an exchange holds the currency in a wallet for a customer, the legal owner remains the exchange, subject to the contract rights with the customer. If the exchange runs into financial difficulties, the currency held in a customer’s digital wallet is subject to forfeiture.
The risk of a member holding his or her digital currency in his or her own wallet separate from the exchanges is that the currency will not be accessible if the member loses the digital key to his or her wallet. However, that is a risk the member can control.
Mitigating Risks for the Credit Unions
The credit unions do not have any operational risks in the referral model. The credit unions are not involved in buying, holding, or selling digital currencies. They do not have any custodial duties. The only credit union duties would be to ensure that the link to the exchange on its website is functioning and its referral duties to inform the members of the exchange services.
As with any third party services, there is always a reputation risk if members are dissatisfied. That is why a credit union must work with people they trust. There is no doubt that when members lose value in digital currencies, they will be unhappy, just as when they lose value with mutual funds. It must be made clear that there is no reliable way to predict whether a particular digital currency is going to increase or decrease in value.
If it were up to me, I would have a disclosure similar to the one given for investment services, e.g., “The value of digital currencies can be highly volatile. A purchaser may lose all or a portion of the purchase price. A buyer should limit his or her purchases to amounts that he or she can afford to lose.”
It is not a bad thing that digital currencies have dramatically increased and decreased in value as that should make members more realistic in their expectations.
Attracting and Retaining Members
Credit unions continue to struggle to attract and retain members. Digital currency is not going away. More and more people will become buyers. Those credit unions that engage responsibly with digital currency have a competitive advantage over those financial institutions that ignore this portion of the financial services industry, especially with younger demographics.
Additional Revenue to the Credit Union
The investment services model is the blueprint for a credit union receiving a portion of the transaction fees from its members’ digital currency purchases. Credit unions will capture a portion of the stream of income that is currently going to digital exchanges not working with credit unions.
As a lifelong advocate for CUSOs, I am happy to see that a CUSO solution to facilitate digital currency purchases has emerged. The name of the CUSO is BankSocial CUSO. BankSocial has online resources to educate members on how to prudently trade digital currencies. If a member elects to buy digital currency, he or she is provided a link to the exchange with a 24 hour help line. As a CUSO, BankSocial CUSO enables credit unions to earn investment returns as well as transaction income.
The future is coming at us fast and those who adapt to the changing environment will have a promising future.
Guy A. Messick is the CEO of NACUSO Business Services, Inc. and can be reached at guy@nacuso.org.