By W.B. King
In what appears to be the biggest crypto understatement of the year, the founder and former CEO of FTX Sam Bankman-Fried told ABC’s “This Week,” which aired December 4, 2022, “Look, I screwed up. Like I was CEO, I had a responsibility here and a responsibility to be on top of what was going on the exchange. I wish I had done much better at that.”
A conservative estimate finds that nearly two billion in investor’s money was lost due to his “screw up.” As Bankman-Fried is being investigated on civil and criminal liability, BlockFi announced in early December that it filed for bankruptcy — a second major blow in as many months to the burgeoning industry.
In an effort to understand how these two pivotal events will impact the credit union industry, Finopotamus reached out to three industry insiders. And while the market shakeup of the last two months is bad news for countless investors caught in the crosshair, these failures, experts noted, may prove beneficial to the crypto movement in the long run.
“FTX and BlockFi are only the latest in a string of collapses in the crypto ecosystem. The scope and scale of losses resulting from those collapses has galvanized both legislators and regulators to act quickly to bring accountability, transparency, safety and soundness to decentralized cryptographic monetary networks and the exchanges that provide access to and between those networks,” said Jack Henry’s Senior Director of Corporate Strategy Lee Wetherington.
Credit unions, he added, “will most likely be the beneficiaries of impending legislation and regulation that will enfranchise chartered financial institutions as trusted settlement layers between centralized fiat monetary networks and decentralized cryptographic monetary networks.”
SRM’s Managing Director, Digital Assets Advisory Services Larry Pruss told Finopotamus that the FTX and BlockFi debacles will “likely place more pressure on properly selecting partners with strong and regularly audited custodians.” He continued, “This is why doing the proper due diligence on these third-party relationships is so critical. It will also provide a short-term opportunity for credit unions to compete solely on trust with the crypto exchanges.”
Embedding Wealthtech Options
PSCU’s Senior Innovation Strategist Lou Grilli said the CUSO “believes in the premise” that crypto is here to stay, but noted that it’s important to reinforce that “it’s not just about bitcoin.”
“The sky-high speculations of last year, followed by the decline of valuations leading to the current crypto winter, along with the lack of confidence in the exchanges brought about by the collapse of FTX, does not diminish the changes we are seeing on the horizon,” he said. “The underlying technology of crypto has the potential to fundamentally change the way we move money cross-border, as well as disrupt the antiquated way property titles are created, stored, updated, and transferred.”
One way crypto may also change the banking space is in auto lending, which Grilli said is an important revenue source for credit unions. To this end, auto loans can be represented “more efficiently as smart contracts on a blockchain,” he explained.
“It’s just a matter of time before this underlying distributed ledger technology transforms other aspects of banking and PSCU wants credit unions, especially those not already thinking about this transformation, to be ready to pivot so they can remain relevant and competitive when the time comes,” he added.
Due to their reputation as trusted financial service providers and intermediaries, Wetherington also believes that credit unions stand to gain from FTX and BlockFi fallout.
“Credit union executives should monitor the formation and passage of new laws governing stablecoins and crypto, and strategically plan for a future in which their core accounting systems must become interoperable with the blockchains atop, which legitimate crypto currencies and digital assets flow,” he said. “In the interim, credit unions must assess the reputational risk of any offering that tacitly endorses a single asset class like crypto, especially if that asset class is riskier than other traditional asset classes and investments.”
As FTX and BlockFi are being investigated, Wetherington said credit union executives should also be thinking “seriously about how to democratize member access to a broad spectrum of low-cost investments, which may or may not include established cryptocurrencies as alternatives,” he added. “Embedding wealthtech options to help average members build financial health and long-term security has never been more important.”
Crypto Fallout Impacting Tech Investing
Over the last several months, Grilli said PSCU has been carefully watching the declining stock market, noting that the tech sector has been hit especially hard.
“Given the current environment of high interest rates, there has been a temporary pull-back in investment in new technology. The FTX event that is dominating news cycles will likewise cause some rethinking by investors, who otherwise might be willing to save an exchange like FTX,” he said.
If there is a silver lining, Grilli said that moving forward crypto investors will “more thoroughly scrutinize” underlying business models. The FTX and BlockFi fiascos, he added, are similar to the dot-com bubble-burst of the late 1990s.
“While the dot-com bust was exponentially greater in terms of lost valuations, it cleared the field of some questionable startups, giving way to some of the tech giants we know today,” she said.
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