What should Credit Unions be doing about Crypto?

According to a recent Cornerstone Advisors survey, 79% of financial institutions have no interest in offering cryptocurrency investing services. This indicates a significant blind spot; according to the same study 15% of US consumers already own crypto, and 60% say they would use their bank or credit union to manage such assets. Consumers will access these new investment vehicles regardless- it would be a shame if credit unions fumbled their chance to be part of that equation.

A big question is when credit unions will be allowed to accept cryptocurrency as loan collateral or a means of exchange. The OCC has issued letters of rules interpretation confirming that nationally chartered banks can provide crypto custodial services as well as hold stablecoin reserves for customers. This is a clear sign of momentum in the field; let’s consider some factors CUs should be evaluating upfront.

Why should crypto assets be valid collateral?

Leading cryptocurrencies such as Bitcoin and Ethereum have large market capitalizations (the total value of coins in circulation) on a par with the country’s 30 largest public companies, as well as a very active, liquid market. These features should make them attractive for firms engaged in traditional fiat currency lending. Price volatility remains high, as evidenced by the recent 35% decline in less than a week. Similar moves can be seen in small cap and recent IPO stocks, yet FIs have found ways to accept those as collateral. It may simply mean accepting a steeper discount from current values in collateral calculations.

A baby step in this direction could involve the exploration of stablecoins- a cryptocurrency class with a value pegged to an asset such as the US dollar or gold. Such an example is the dollar-linked Tether.

Signature Bank in New York recently began accepting cypto as an asset, opening up a fresh lending market in the process. Signature’s CEO Joseph DePaolo has said that he sees a trend towards traditional financial institutions using their balance sheet to finance loans secured by additional asset types including cryptocurrencies. Only a few cryptos can currently be used as collateral; it will probably take some time before others develop deeper, established markets and are added to the mix. Still, it’s an exciting development.

What is the demographic of customers that want to use crypto as collateral?

Most people who trade on crypto exchanges are looking to speculate and profit from short-term price movements. However, there are a meaningful number of traders who take long-term positions in particular coins they believe will appreciate over time. By then borrowing money using the crypto holdings as collateral, the investor can fund current spending needs while also deferring capital gains taxes. In theory this is no different than a common investor strategy for stock or precious metal holdings.

As an example, let’s imagine that a long-term $10,000 investment in the cryptocurrency Decred has increased to $30,000 in value over the course of six months. You believe there will be further appreciation, but you also have some immediate cash needs. Here are two options:

• Sell a portion of your Decred holdings, pay an ordinary tax rate on the gain, and use the remainder for your cash needs
• Continue to hold all of your Decred, using it as collateral for a loan covering your cash needs. Then repay the loan over time, possibly with proceeds from a later sale of Decred, but at a lower capital gain tax rate and (assuming your investment intuition is correct) at a higher price.

Who would be interested in such a loan? Refer back to the first paragraph and the estimated15% of Americans- likely skewing toward the sought-after younger segments- that own crypto in some form. Crypto.com has estimated the global number of owners at 106 million and growing. Obviously a small slice represents an appealing market.

I’m not suggesting that credit unions should become full bore crypto trading desks. There are several more measured steps they can take, however, to constructively meet the needs of current and prospective members by providing new products and services closely related to existing operations and mission. We’ve love to discuss this further with you- contact me at jb@big-fintech.com