(Oct. 29, 2021) Coordination with state and other federal regulators on regulation of decentralized finance (DeFi) and other emerging uses of digital assets is crucial to avoid conflicting rules and confusion, NASCUS wrote in a comment letter to NCUA– one of two posted by the association to the agency this week.
However, the association noted, the regulated and trusted incumbent credit union and banking systems offer the best and safest path forward for the growing consumer use of digital assets and the other innovations brought forth by DeFi.
The letter was in response to the NCUA Board’s July-issued “request for information,” which highlighted the agency’s interest in the impact of distributed ledger technology (DLT, such as blockchain) and DeFi. The original comment due date was extended late last month by 30 days, closing out Oct. 27.
The RFI posed more than two dozen questions over five subject areas: the use of DLT and DeFi applications within the credit union system; development of such projects with third-party relationships or credit union service organizations (CUSOs); risk and compliance management; supervision, including whether and how regulation should be revised to address such activities; and share insurance and resolution – including, among other things, how to distinguish between uninsured digital assets and insured shares.
The state system said it applauded the agency for developing its understanding of DeFi, emerging technologies, and how “credit union stakeholders have engaged with digital assets and emerging DeFi ecosystem.”
However, NASCUS also “strongly recommended” that the agency coordinate with both state and other federal regulators with jurisdiction over products, services and participants engaged in DeFi. “Lack of coordination between regulatory systems can lead to conflicting rules and supervisory expectations that would further complicate and hinder credit union participation in the DeFi ecosystem,” NASCUS stated.
As an example, NASCUS noted that there is a “dizzying array of evolving digital currency with critically distinct features,” pointing to (among others) unregulated decentralized convertible virtual currency (CVC), stablecoins, and central bank digital currencies (CBDCs). “Each of these types of currencies carry different consumer protection, money laundering, and volatility risks,” NASCUS wrote. “Close coordination between regulators will help ensure a common understanding of which products carry which risks.”
Further, NASCUS wrote, NCUA should focus “narrowly on material financial safety and soundness risks with respect to federally insured state credit unions (FISCUs) and defer to state law regarding permissibility of FISCU activities in this space. So doing will ensure the most vibrant innovation for credit union engagement in DeFi by leveraging the power of the dual chartering system.”
In other comments, NASCUS wrote:
- The DeFi ecosystem is diverse, and regulation should distinguish between those credit unions using digital assets, creating digital assets, providing services to members’ use of digital assets, and credit unions’ own use of DeFi technology. “A one-size-fits-all approach to regulating, or supervising, credit union engagement with DeFi will stifle innovation and leave stakeholders at a competitive disadvantage,” NASCUS stated.
- Providing an on-ramp to DeFi stakeholders will require the agency to consider enhanced flexibility in existing rules and powers for credit unions. For example, NASCUS wrote, facilitating credit unions’ ability to explore “banking as a service” (BaaS, offered in partnership with financial technology (fintech) firms) “may require evolving views on associational field of membership or authority to provide pass-thru services to a business member’s customers.” Further engagement with fintechs, NASCUS wrote, “may require expanding permissible services for natural person and corporate CUSOs and permitting credit unions to hold equity investments in non-CUSO fintechs and other entities.” The preemptive application of its rules on FISCUs’ state-authorized powers should be minimized by NCUA, NASCUS argued, to allow the dual chartering system to maximize its potential for innovation among the states.