FTX May Be Gone, But Crypto Impact On CU Industry Is Just Beginning

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Ok, let’s be honest. If you’ve been following the news of the FTX cryptocurrency platform and the arrest of former Wunderkind Sam Bankman-Fried, then all the research you’ve done has come to nothing, not to mention the fancy new title of Vice President of Digital Operations. You might think so. I am here to tell you that your expertise is as much needed now as it ever was. In fact, there are many lessons to be drawn from the demise of FTX that will help shape the development of the crypto industry in a positive way for years to come.

Why am I bullish on cryptocurrencies? To be clear, I am not bullish on cryptocurrencies. In fact, two things I have never done are opening a Facebook account and buying bitcoin. However, we believe that the distributed ledger technology (DLT) that underpins the use of any cryptocurrency 10 years from now will become an increasingly integral part of all financial institutions. of their size.

The appeal of DLT technology is that it allows two parties to verify and record financial transactions without the need for a third party such as a bank or credit union. The term cryptocurrency is a reference to the fact that every transaction is verified based on a proprietary cryptographic algorithm recorded on a computerized ledger. This ledger can be public or restricted to a few people. The result is an efficient way to expedite business in a way that eliminates most disputes. The same technology that validates cryptocurrency transfers can be used to validate virtually any kind of transaction. One day, consumers will be able to use this technology to buy homes via blockchain without having to pay lawyers or worry about the validity of their title.

This is not a techno fan’s fantasy. In fact, most people who know me think I’m a bit dumb. Jamie Dimon correctly described cryptocurrency as a Ponzi scheme. However, his company recently executed the first cross-border currency transaction on a public blockchain.

So does all this mean that the FTX debacle was just an on-screen blip? In fact, for the technology to reach its full potential, a regulatory framework is needed, during which BSA professionals must remain vigilant against the technology’s potential misuse. A classic example of good technology that can be used to promote bad things. FinCEN has repeatedly notified financial institutions that cryptocurrencies can be used to facilitate a variety of crimes, from sex trafficking to ransomware attacks. The privacy and speed offered by cryptocurrency transactions means that there will always be a market for technology and the need to convert cryptocurrencies into cash. As trading platform consolidation caused by the demise of FTX pushes money launderer activity further underground, we will see crime fueled by DLT.

You may also have your own concerns about safety and soundness. Silvergate, a state-chartered community bank that has provided an innovative funding platform for FTX and other cryptocurrency traders, is straining by deposit execution despite not owning cryptocurrencies. suffer from significant concentration risks.

Many, but not all, of these problems can only be addressed through the development of regulations. Most importantly, a decision must be made as to whether cryptocurrencies should be treated as securities. This should be under SEC oversight (my preference) or CFTC oversight, reportedly Sam’s favourite. bankman fried. I rest my case.

Another reason we need regulation is simply so that we can all speak the same language. This is the most basic step to having an enforceable legal framework. For example, NCUA now primarily refers to his DLT when discussing these issues, while FinCEN refers to Convertible Virtual Currency (CVC). This kind of terminology imprecision creates unnecessary confusion along the edges, making it easy for businesses to avoid common sense oversights. For example, the SEC had to sue BlockFi Lending to make it clear to consumers that they were putting their money in a federally insured bank. Unfortunately, a truly robust regulatory framework can only be achieved through the passage of federal law. As much as C-SPAN’s shows resemble the Jerry Springer Show, I’m not optimistic about Congress’ ability to tackle big issues.

As this new financial ecosystem continues to evolve, NCUA and the credit unions can emerge victorious. By the time the NCUA issues initial guidance on the use of blockchain and distributed ledger technology, credit unions will work with third-party vendors to enable them to offer “electronic wallets” to members who want to track cryptocurrencies. By now, banking regulators have already issued a series of opinions allowing banks to participate in a wide range of cryptocurrency activities. In the aftermath of FTX, these same regulators had to scramble to issue a joint statement emphasizing the need for banks to mitigate the threat cryptocurrencies pose to the larger economy.

This is the best I’ve seen in a while, showing that the industry’s non-profit status has allowed for a more methodical approach to financial innovation than allowed in the for-profit banking sector. is one of the examples of

Both models have their role, and much remains to be done as both regulators and individual financial institutions explore potential uses for DLT. In the meantime, credit unions should continue to explore this technology and its potential uses. Otherwise, it would be the same as ignoring the Internet in the early 2000s.

Henry Meier, Esq.

Henry Meier is a former General Counsel for the New York Credit Union Association and author of the popular New York State of Mind blog. He currently provides legal advice to credit unions on a wide range of legal, regulatory and legislative matters. He can be reached at (518) 223-5126 or by email. [email protected].