While traditional banks may still lead the financial industry in terms of assets, credit unions are gaining popularity among eligible Americans.
According to recent data, there are approximately 4,600 credit unions in the United States. Approximately 139 million Americans are members of federally insured credit unions, a 20% increase over the past five years, according to a September 2023 report from the National Credit Union Administration.
Additionally, the credit union market size, measured by sales, totaled $126.2 billion last year.
John Wingate, CEO of financial platform BankSocial, explained to Cryptonews that credit unions operate as member-owned banks. “Unlike for-profit banks, which are owned by shareholders, credit unions are owned by one member, one share, one vote,” Wingate said. “This is perfectly consistent with the spirit of decentralized finance.”
Despite these adjustments, credit unions face challenges that could hinder future growth. Kyle Hauptman, NCUA vice president, noted that credit unions often engage in a cumbersome process called “loan participation,” where they split and sell ownership of a loan. This process can be complicated because the credit union purchasing the participating shares may not know whether payment has been made or whether the selling credit union will pay its required portion.
Hauptman suggested that tokenizing small loans could solve these problems. “The smart contract will automatically pay its share to the purchasing credit union, eliminating the need for the purchasing credit union to inquire about payment,” he said.
Ravi de Silva, Managing Partner at de Risk Partners, noted that tokenization can improve compliance risk management by providing greater transparency, security, and efficiency. He pointed out that tokenization could help anti-money laundering (AML) purposes by enabling efficient analysis of transaction data and improving customer due diligence processes.
Considering these benefits, some credit unions have begun implementing tokenization solutions. BankSocial is working with several credit unions to tokenize identity and transaction data through hashing. Wingate noted that BankSocial’s solution uses Hedera Hashgraph’s distributed ledger technology to tokenize payments and deposits for peer-to-peer transactions on the Hedera network.
Additionally, Metallicus is working with credit unions such as Vibrant, Meritrust Credit Union, and Fairwinds through the Metal blockchain to develop blockchain-based solutions. According to Marshall Hayner, COO of Metallicus, the Metal blockchain allows financial institutions to create interoperable ledgers for seamless communication.
Despite these developments, regulatory concerns remain. Hauptman noted that credit unions are uncertain whether the tokens can be considered securities. Although the NCUA has provided guidance on the use of tokenization, other regulatory issues remain, including KYC processes and token custody.
Nonetheless, Hauptman believes that U.S. credit unions are better positioned than banks to implement tokenization, thanks to regulatory clarity from the NCUA. For example, in July 2021, the NCUA released a report titled “Request for Information and Comments on Digital Assets and Related Technologies,” followed by guidance documents on digital assets and distributed ledger technologies.
De Silva emphasized the importance of credit unions working closely with their compliance teams to adopt industry best practices for tokenization. “It is important to build a strong framework to align tokenization practices with regulations while prioritizing the security and privacy of customer data,” he said.
Through continued collaboration and compliance with regulatory guidance, credit unions can successfully navigate the complexities of tokenization and leverage its potential benefits.
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