(Dec. 17, 2021) To clarify existing authority about federally insured credit unions (FICUs) establishing relationships with third-party providers of digital asset services to their members, NCUA issued a letter to credit unions Thursday.
The agency, in letter to credit unions (LTCU) 21-CU-16 said the relationships are allowed under current regulation “provided certain conditions are met.”
“This includes third-party provided services to allow FICU members to buy, sell, and hold uninsured digital assets with the third-party provider outside of the FICU,” NCUA wrote. “Digital assets are one of many terms used to describe distributed ledger technology (DLT) based tokens.”
The agency said its role as an insurer does not prohibit FICUs from establishing the relationships. “The authority for federal credit unions (FCUs) to establish these relationships is described in section II of this letter,” the agency wrote.
“The authority for federally insured, state-chartered credit unions (FISCUs) to establish these relationships will depend upon the laws and regulations of their states,” it added.
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Relationships with Third Parties that Provide Services Related to Digital Assets
(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.
Comment from National Association of State Credit Union Supervisors
(Oct. 1, 2021) More time – 30 days – is allowed for comments on NCUA’s request for information (RFI) about the impact of activities connected to digital assets and related technologies, according to a notice published this week in the Federal Register.
The original comments-due date was Monday (Sept. 27).
The request for information (RFI), was first issued in July by the NCUA Board. It highlights the agency’s interest in the impact of distributed ledger technology (DLT, such as blockchain) and decentralized finance (DeFi).
The RFI poses 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.
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Comment period for digital assets RFI closes Oct. 27
(Sept. 10, 2021) NCUA’s request for information (RFI) on digital assets and related technologies is the latest summary posted on the association’s website; comments are due Sept. 27.
Like all NASCUS summaries, it is available to members only.
In July, the NCUA issued the RFI, with a particular eye on current and potential uses for credit unions and the risks associated with them. NCUA said the effort is to engage the credit union system and other stakeholders in learning how emerging distributed ledger technology (DLT) and decentralized finance (DeFi) applications are viewed and used. In particular, the agency said, it wants feedback on the role NCUA can play in “safeguarding the financial system and consumers in the context of these emerging technologies.”
The agency described DeFi as the broad category of applications adopting peer-to-peer networks to create digital assets like cryptocurrency and crypto-assets, clearing and settlement systems, identity management systems, and record retention systems. DLT (which includes blockchains) consists of a shared electronic database where copies of the same information are stored on a distributed network of computers.
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(July 23, 2021) In other action Thursday, the NCUA Board issued a request for information on digital assets and related technologies, with a particular eye on current and potential uses for credit unions and the risks associated with them.
In issuing the RFI, NCUA said it wanted to engage the credit union system and other stakeholders and learn how emerging distributed ledger technology (DLT) and decentralized finance (DeFi) applications are viewed and used. In particular, the agency said, it wants feedback on the role NCUA can play in “safeguarding the financial system and consumers in the context of these emerging technologies.”
“The accelerating pace of change information technology brings, coupled with the widespread diffusion of computing power and the growing importance of networks, is raising new opportunities and challenges,” the agency said. “In order to continue to fulfill its mandate to maintain a safe and sound credit union system and protect credit union members, the NCUA is working to better understand the implications of these changes and the associated benefits or challenges that may exist.”
The agency described DeFi as the broad category of applications adopting peer-to-peer networks to create digital assets like cryptocurrency and crypto-assets, clearing and settlement systems, identity management systems, and record retention systems. DLT (which includes blockchains) consists of a shared electronic database where copies of the same information are stored on a distributed network of computers.
Comments will be due in 60 days after publication in the Federal Register.
In a late development, the agency board dropped consideration of its 2022-26 strategic plan for this meeting (which it announced in a press release the day before the board meeting). Given that there will be no August NCUA Board meeting, the earliest the strategic plan could reappear on the board’s agenda would be for its September meeting.
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Request for Information and Comment, Digital Assets and Related Technologies