October 27, 2021
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314
Re: NASCUS Comments on Request for Information and Comment on Digital Assets and Related Technologies; NCUA Docket 2021–0102.
Dear Secretary Conyers-Ausbrooks:
The National Association of State Credit Union Supervisors (NASCUS) submits this letter in response to the National Credit Union Administration’s (NCUA’s) request for information and comments on Docket 2021-0102, Digital Assets and Related Technologies. NCUA seeks information on the impact upon the credit union system of Decentralized Finance (DeFi) and digital assets and the extent to which credit unions are engaged in related DeFi activities.
The prospective regulation and supervision of digital assets and DeFi in the credit union space is a complex undertaking. NASCUS applauds NCUA for working to develop the agency’s understanding of DeFi, the emerging technologies, and how credit union stakeholders have engaged with digital assets and emerging DeFi ecosystem.
Even at this preliminary phase of NCUA’s inquiry, NASCUS strongly recommends NCUA coordinate with both state regulators and other federal regulators with jurisdiction over products, services, and marketplace participants involved in DeFi. We further recommend NCUA 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.
To foster an environment in which credit union stakeholders that wish to do so may engage with the DeFi ecosystem in a prudent and informed manner, it is essential that NCUA and other federal bank regulators coordinate with state regulatory authorities to develop a common taxonomy and lexicon regarding existing and emerging technologies and assets. Uncertainty as to which products and technologies fall within which regulatory or supervisory frameworks complicates a credit union’s calibration of compliance with innovation and may have a chilling effect on stakeholders’ willingness and ability to compete in the developing marketplace.
In addition, 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. Development of a supervisory framework will be further complicated by jurisdictional issues related to prudential oversight of both entities and products/activities, by determinations as to eligibility for deposit/share insurance, as well as by international regulatory developments.
As but one example, while common nomenclature employs the terms “crypto currency” and “convertible virtual currency” (CVC) among others, there is a dizzying array of evolving digital currency with critically distinct features such as unregulated decentralized CVCs, stable coins, and central bank digital currencies (CBDCs) (to name but a few). Each of these types of currencies carry different consumer protection, money laundering, and volatility risks. Close coordination between regulators will help ensure a common understanding of which products carry which risks.
We encourage NCUA to proactively dialogue with state regulators and the agency’s fellow federal regulators on these issues to ensure as consistent regulatory and supervisory rubric as possible.
Consideration of Issues Related to Digital Assets Should Distinguish Between Credit Unions Utilizing Digital Assets, Creating Digital Assets, Providing Services to Members’ Using Digital Assets, and Credit Union use of DeFi Technology
As NCUA’s RFI illustrates, the DeFi ecosystem is diverse. Therefore, supervisory considerations must distinguish between its various elements: products, services, and technology. There are vast differences between credit unions engaging directly in the digital asset crypto currency space, adopting DeFi related technology to support legacy activities, partnering with fintechs to provide Banking as a Service (BaaS), or providing legacy banking services (such as custodial services or lending to crypto currency businesses) to support their members’ use of digital assets. 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.
Existing Credit Union Powers and Authorities Should Be Re-evaluated Considering the Rapidly Evolving Marketplace
Providing the credit union system a robust on-ramp to engaging with the various DeFi stakeholders will also necessitate consideration of enhanced flexibility to existing rules and credit union powers. Facilitating credit union ability to explore BaaS may require evolving views on associational field of membership or authority to provide pass-thru services to business member’s customers. Engaging with fintech, or serving members’ needs for ancillary services related to digital assets 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. As a general matter, NCUA should minimize the preemptive application of its rules on FISCUs’ state authorized powers. So doing would allow the dual chartering system to maximize its potential for innovation among the states.
The DeFi ecosystem presents a plethora of opportunities and challenges for credit union system stakeholders, consumers, and regulators. It is foreseeable, and understandable, that some commenters will have reservations regarding adoption of DeFi, particularly digital currencies. While NASCUS harbors concerns regarding consumer protection and money laundering related to some CVCs, the fact remains that CVCs are in use by consumers. We believe the best and safest path forward for the growing consumer use of digital assets and the other innovations brought forth by DeFi is through the regulated and trusted incumbent banking and credit union systems.
NCUA’s RFI is a timely step in establishing a credible path forward for credit union engagement with the DeFi ecosystem. We encourage NCUA to continue a thoughtful and collaborative approach to these issues.
NASCUS is the professional association of the nation’s 45 state credit union regulatory agencies that charter and supervise over 2,000 state credit unions. NASCUS membership includes state regulatory agencies, state chartered and federally chartered credit unions, and other important stakeholders in the state system. State chartered credit unions hold over half of the $1.97 trillion assets in the credit union system and are proud to represent nearly half of the 126 million credit union members.
 “Request for Information and Comment on Digital Assets and Related Technologies” 86 Fed. Reg. 40213 (July 27, 2021).
 We note that in addition to NCUA’s RFI, the Federal Deposit Insurance Corporation (FDIC) issued a RFI on Digital Assets on May 21,2021 (available at https://www.govinfo.gov/content/pkg/FR-2021-05-21/pdf/2021-10772.pdf) and the Conference of State Bank Supervisors published the Money Transmission Modernization Act on September 9, 2021 which addresses, in part, digital assets and virtual currencies.