Blockchain Legal Resource

The National Credit Union Administration (NCUA) recently published a request for information in the Federal Register that encourages credit unions and other industry participants to provide information on the current and potential impact of digital assets and related technologies on federal credit unions.

In the press release announcing the request for information, NCUA Chairman Harper emphasizes that the notice is “the logical next step for federally insured credit unions to operate in [the cryptocurrency] arena.”

While most federal banking regulators are highly focused on cryptocurrency, the NCUA hardly mentions cryptocurrency in its request for information. Instead, the NCUA is requesting information more broadly on the underlying distributed ledger technology (DLT) as well as decentralized finance (DeFi) activities.

As described by the NCUA, DeFi “is the broad category of applications adopting peer-to-peer networks [and] encompasses a broader range of different digital and financial products including settlement systems, security-like and equity-like financial instruments, non-fungible tokens, and discount tokens.”

DeFi is mentioned in over half of the NCUA’s 26 questions that are contained in the request for information. It is interesting that the NCUA focuses on DeFi, which encompasses a concept that many consider inherently opposite of traditional finance, because credit unions are part of the traditional centralized finance system.

However, the NCUA’s focus on DeFi might actually be quite perceptive. There is an increasing number of experts that believe DeFi and traditional finance will coexist as DeFi matures. Credit unions could provide significant credibility to DeFi projects as well as assist with certain critical functions, including BSA-AML compliance as just one example.

Credit unions also have the potential to provide stability to the DeFi industry by serving as the on-ramp and off-ramp for decentralized applications. To do so, the NCUA needs to receive meaningful feedback that will assist it with developing clear regulations and guidance that can establish the necessary framework for credit unions to provide such services.

Based on Chairman Harper’s comments and the questions in the request for information, it is clear the NCUA sees a lot of opportunities for credit unions with respect to DLT, DeFi and digital assets. However, the NCUA also highlights the risks that it believes are presented by DeFi, including with respect to consumer recourse for fraud, implications of ineffective cryptocurrency custody solutions, and opportunities for money laundering.

The NCUA’s questions are divided into five broad categories:

1. Questions regarding usage and the marketplace.
2. Operational questions.
3. Questions regarding risk and compliance management.
4. Questions regarding supervision activities.
5. Questions regarding share insurance and resolution.

The NCUA hopes to receive comments that will allow it to understand what “role the NCUA can play in safeguarding the financial system and consumers in the context of these emerging technologies.”

Chairman Harper recognizes the role that third-party service providers will play as credit unions begin embracing new technologies. His press release mentions the agency’s request for Congress to adopt legislation that will provide the NCUA with examination and enforcement authority over such third-party vendors.

Comments must be received on or before September 27, 2021 to ensure consideration.