By Roy Urrico
It is hard not to notice the growing popularity of cryptocurrency, but for it to become part of a typical credit union environment, it needs to overcome some of its reputation and security concerns.
In the last of a two-part series, we focus on cryptocurrency’s security and reputation issues and speak to a couple of fintech companies, Genesis and Finastra, seeking to overcome those concerns.
Following the National Credit Union Administration’s (NCUA) announcement to permit third party digital asset solutions, credit unions now face a mounting cryptocurrency push.
According to Brandessence Market Research, the global crypto payment gateway market will grow at a compound annual growth rate of 22.8% from 2022-2028. The study expects North America to capture the largest share in the global crypto payment gateway market owing to the high popularity of crypto currencies and a rising adoption.
Security a Top Cryptocurrency Barrier
Deloitte’s 2021 Global Blockchain Survey report, released in October 2021, found although a majority of financial services executives believe that cryptocurrency will replace or rival fiat (government-issued) currency within the next five to 10 years, the report stated cybersecurity, regulatory and privacy issues remain among the primary impediments to its acceptance.
"In the U.S., it remains unclear as to whether regulators will continue a piecemeal guidance effort [around cryptocurrency], or whether the Securities and Exchange Commission, banking regulators and the Commodity Futures Trading Commission will join forces and coordinate, or whether Congress will act to establish an end-to-end framework," the Deloitte survey noted.
Al Pascual, senior vice president of data breach solutions at Sontiq, a TransUnion company, described cryptocurrency as a poorly regulated $3 trillion market with some financial institutions looking to provide services once they are in a position to do so. “Banks and credit unions will ultimately be custodians. They will offer services as they relate to cryptocurrency. (However) generally fraud and security tend to be second-string considerations.” He suggested credit unions and banks are entering the cryptocurrency space blind, “which makes it even worse.”
Pascual acknowledged some fintechs players are interested in playing a significant role as gatekeepers and stewards. “We're thinking a lot about it as well. But I can see this going off the rails quickly and causing all kinds of systemic problems. It really starts with just good security, fraud, and identity-oriented controls.”
It does not help that cryptocurrency security issues keep grabbing headlines:
In August 2021 Japan-based cryptocurrency exchange Liquid suffered a cyberattack that led to the loss of $97 million.
In February 2022, FBI agents arrested a New York couple for allegedly conspiring to launder most of the cryptocurrency stolen during the 2016 hack of a virtual currency exchange that is now worth $4.5 billion.
Genesis Looking to Help Credit Unions Enter the Space
Genesis, a New York City-based cryptocurrency prime brokerage for institutional investors, is looking to overcome financial institution tentativeness by working with credit unions and other traditional financial institutions interested in entering the crypto space.
Leon Marshall, managing director, head of institutional sales, for Genesis, said, “Credit unions have been under pressure from consumer fintechs, the household names who have been offering crypto asset services as part of their offering. I think credit unions have noticed that (and) they've taken notes and they said (to) themselves, ‘okay, what can we do to remedy this?’”
Marshall added, “It is important for credit unions and their members to work with a partner that is both nimble and innovative. We are confident that that is exactly what Genesis can offer. We offer a range of services unmatched in the ecosystem.”
The company, which offers spot and derivatives (an agreement between a buyer and a seller for the future price of a digital asset) trading, borrowing and lending, and a custody solution for its clients, loaned a record $50 billion of assets in the fourth quarter of 2021, with over $150 billion in cumulative originations since the Genesis lending desk's launch in March of 2018.
Genesis also facilitated $300 billion transactions during 2021, and that included about $130 billion of loan originations and $53 billion of swap derivatives notional volume (instant crypto exchange), according to Marshall. “We are really seeing that business grow and we really look to credit unions to be the next client segment that will really take advantage of it.”
Marshall suggested Genesis can assist credit unions, outside of simply buying and selling assets, by exposure to derivatives for hedging purposes, earning yield on its lending desk, securely holding assets as a custodian, and through its network and education that comes with working with a partner like Genesis, which has been in the space for a long time.
Marshall ensures Genesis runs its business in a highly regulated and 100% secure way. Genesis Trading, its broker-dealer, holds a BitLicense in New York and also is registered with by both the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) in the U.S.; and the Financial Conduct Authority (FCA) in the United Kingdom. “That gives us a regulated and highly compliant background, which I think sets us apart from many others in the crypto asset industry.”
“This is why who credit unions partner with matters. We set ourselves apart because of the longevity of our involvement in the space. We worked through the early challenges of the blockchain revolution,” continued Marshall. “What that means is we worked very closely with other parties to ensure that the providence of coins that we receive is of good standing. We have a very strong network.”
At a high level, Genesis stores private keys (secret numbers used in cryptocurrency) in a former nuclear bunker, patrolled 24x7 by highly trained security officers. “Those keys are never exposed online. In addition, we also have insurance policies on non-online assets (or cold wallets).”
For Genesis’ lending platform, it offers yields to customers in stablecoins (cryptocurrencies that have their values attached to another asset such as the U.S. dollar); as well as Bitcoin, Ethereum, and Solan, and 50 other digital assets.
Finastra to help FIs Integrate Cryptocurrency Services
Over the last six months the London-based financial software company Finastra, which also operates from Lake Mary, Fla., announced a number of crypto-friendly plans that could interest credit unions:
The creation of Allied Bitcoin Wallet, a new app available on Finastra’s FusionStore, created by the Allied Payment Network in partnership with NYDIG.
The availability of Bakkt’s digital marketplace and wallet available through Finastra’s open developer platform and app store, FusionFabric.cloud.
The accessibility of Liquid’s Quick Exchange (QEX) app’s through FusionFabric.cloud.
“The idea here is making it as frictionless as possible for members or customers to actually go in and access a crypto experience,” said Philip Taliaferro, head of partner and fintech ecosystem, at Finastra. For credit unions, Finastra provides “A gateway that enables members to invest and participate in crypto very seamlessly, without [the credit union] actually being responsible as custodian for the asset.”
Finastra sees the crypto assets supplementing its core banking, lending and digital experience platforms within the North American community markets in which it claims to have more than 5,000 financial institutions as customers. “We started to hear more and more (about cryptocurrency), but we're also responding to customer inquiries about the importance of getting into the crypto space,” said Taliaferro. He added, “We've started by basically taking two partnerships (Allied Payment Network and Bakkt) and embedding a user experience directly into the digital banking app.”
The login and credentialing happen within the financial institution. “All (the member) is really doing is tying this to my existing banking account, my existing relationship with the credit union. I am basically using the same KYC (know your customer) guidelines I had with my financial institution. I have the ability to fund my crypto wallet directly with my existing checking or savings account,” Taliaferro said. Members with an existing digital account have the ability to buy, sell, or trade crypto assets. “You're able to roll up some of the financial details of your crypto wallet into your account overview — all integrated as part of the experience.”
How does Finastra plan to overcome some of its cryptocurrency’s reputation and security concerns?
“Custody is a big topic here,” explained Taliaferro, who noted there is general desire from community financial institutions today to not be in the business of custody of crypto assets themselves. “We've started by partnering with firms that offer custody as part of their solution.”
Taliaferro further explained that Finastra provides the gateway for credit unions to enable members to invest and participate in crypto very seamlessly with actually custody belonging to a third party and not the credit union.
Shuki Licht, chief innovation officer at Finastra, said the end goal for Finastra is to help financial institutions manage everything within decentralized finance. This includes regulation, security and privacy as well as liquidity and collateral risk. “(Finastra) decided to start with baby steps. And the first steps are to move all this accountability to the third party. That means that the bank just needs to embed this wallet and all the complexity and heavy lifting is done by third party.”
Licht also noted the financial institution can start slowly venturing into the crypto space and start to see if there a value to its customer.
Crypto As Part of The Credit Union Experience
For financial institutions the advent of crypto seems inevitable. Marshall said, “Credit unions are now looking to be differentiators for their members.”
Taliaferro held, “You have the FIs who are sort of trying to protect their incumbency and their existing customer relationship. It is going to be interesting to watch how crypto firms try to expand the range of services that they're offering to customers and try to continue to grab wallet share.”
Deloitte’s 2021 Global Blockchain Survey report noted, “The business imperative of adopting blockchain and digital assets is growing noticeably, as organizations increasingly accept that their current business models are at stake. More than threequarters of (financial service Industry) respondents strongly or somewhat agree that their organization will lose an opportunity for competitive advantage if they fail to adopt blockchain and digital assets.”