When It Comes to Crypto, If You Can’t Beat ‘Em, Join ‘Em

The last time I talked about crypto was March of last year, following the SVB bank run. I complimented the NCUA because its go-slow approach to approving cryptocurrency-related activities for credit unions had largely been vindicated after all. When the fraud of Sam Bankman-Fried was exposed, the credit union industry was unscathed, even as three large banks needed to be conserved. At the time I would have gladly bet you that cryptocurrency was about to go the way of the tulip market in 1637, another example of a financial frenzy replacing common sense with greed.

Unfortunately, the same guy would have gladly bet you that the Cleveland Browns and Dallas Cowboys would win this past weekend. For better or worse, last week the SEC gave into reality when it approved the sale of ETP funded Bitcoins on the registered securities market. This development gives your members, many of whom are at an age when they want to maximize their income while bracing for retirement, another convenient way of investing in Bitcoins. After all, they don’t even have to figure out how to set up a digital wallet.

With this announcement, regulators, policymakers and bankers have to acknowledge that we may have crossed the Rubicon when it comes to cryptocurrencies. If a Bitcoin can be worth $49,000 even after cryptocurrencies writ large were seemingly exposed as easy to manipulate, grossly unregulated quasi-Ponzi schemes, then it is time to see how the financial industry can help consumers utilize digital currency in a safe and sound manner. Incidentally, for purposes of this article, when I’m referring to cryptocurrencies, I’m referring to electronic currencies that are traded for value but maintained on a decentralized ledger, commonly referred to as a blockchain.

I really thought that Gary Gensler would be able to rein in the excesses of crypto currencies as the Chairman of the SEC. After all, he had taught about the subject at MIT, and he famously proclaimed cryptocurrency to be the “wild west” of financial regulation. Unfortunately, his ambitions have largely been blocked by a series of recent court decisions, narrowing the application of securities law to digital currencies.

For example, the approval of a Bitcoin ETP came in the aftermath of a decision by a district court in Washington D.C., holding that the SEC acted irrationally when it approved an ETP for digital future’s contracts while prohibiting ETPs for Bitcoins (Grayscale Invs., LLC v. Sec. & Exch. Comm’n D.C. Cir. 2023). In addition, Gensler has argued that cryptocurrencies should be regulated as securities, but a decision by a federal district court in New York left the SEC with a much narrower definition of securities for cryptocurrency purposes (Sec. & Exch. Comm’n v. Ripple Labs, Inc. S.D.N.Y. Oct. 3, 2023). It’s hard to envision a future SEC being able to regulate the cryptocurrency space any more strongly than Chairman Gensler wanted to, at least in the absence of congressional action.

This new reality means that our members are going to have yet another alternative to placing their money in credit union accounts. In addition, these same members are going to be looking through services that help facilitate digital currency transactions. They can either find these services by working with non-bank fintechs or utilizing services made available by their credit unions. In other words, in light of the inevitable integration of this currency into the economic mainstream, it’s time for the NCUA to recalibrate its legitimate safety and soundness concerns against the expectations of our members.

The NCUA has already taken an important step in this direction. In 2021, it offered this guidance explaining that credit unions were authorized to enter into referral relationships with third-party vendors offering electronic wallet services. But if digital currency is here to stay, credit unions have to be given much greater authority than simply to pass on business to fintechs.

Allowing credit unions to directly provide digital wallet services for their members would be a great place to start. After all, protecting our members’ funds and most prized assets are among the most important services provided by credit unions. Such authority was authorized by the OCC for banks in 2021, putting credit unions at a competitive disadvantage. The importance of this issue was underscored by its inclusion in a letter to new NCUA Board member Tanya Otsuka by the America’s Credit Unions association (that is going to take some getting used to).

There is also an important step that can be taken on the state level. In 2022, the State Uniform Law Commission finalized model legislation intended to make it easier for people and businesses to buy, sell and pledge cryptocurrencies. Most importantly, these proposed amendments create a new UCC Article 12 for the purpose of establishing a framework for the sale and pledging of electronic currencies, which it generally refers to as Controllable Electronic Records.

There is no more important a responsibility for financial institutions to protect the value of their collateral. But the UCC was developed on the assumption that collateral, such as a house or a car, is tangible. In contrast, not only are cryptocurrencies intangible, but they are created by a distributive framework that is explicitly designed to eliminate the need for a centralized aggregator such as a clearing house or depository institution.

If it is inevitable that cryptocurrency is going to go mainstream, then it is in everyone’s interest to have a system in which the currency’s owners can be identified and the amount of liquidity available to our members is maximized by allowing them to buy, sell and pledge their cryptocurrency to the same extent as other assets. Currently however, only a handful of states, including California and Nebraska, have adopted the UCC amendments.

It is worth the time and effort of every state-level credit union association to analyze this proposal and decide for themselves if they think it is time to advocate for these amendments. After all, federal action in this area is highly unlikely in the short term and if the SEC’s recent ETP announcement is any indication, digital currency is here to stay.

Henry Meier is the former General Counsel of the New York Credit Union Association, where he authored the popular New York State of Mind blog. He now provides legal advice to credit unions on a broad range of legal, regulatory and legislative issues. He can be reached at (518) 223-5126 or via email at henrymeieresq@outlook.com.