Compliance Blog

At the end of July, the National Credit Union Administration (NCUA) published a request for information (RFI) in the Federal Register on decentralized finance (DeFi), digital assets , distributed ledger technology (DLT), and other things that might be necessary to incorporate DeFi and digital assets into delivering products and services to credit union members. The RFI indicated that the NCUA must receive any comments no later than September 27, 2021. NAFCU credit union members can also submit comments to NAFCU through this link from NAFCU’s Regulatory Alert on the RFI. Comments to NAFCU should be submitted no later than September 13, 2021—next Tuesday.

NAFCU’s Regulatory Alert provides a brief introduction to the concepts of DeFi, digital assets, and DLT. As described in both the Regulatory Alert and the RFI, DLT is the underlying technology that makes DeFi possible. A real-world example might be helpful in putting all of this together. Ethereum is the technology that supports several applications intended to make financial services open to anyone that can use the technology. This open access is at the core of DeFi, and the DeFi applications that are based on Ethereum permit users to do all sorts of things, such as obtaining traditional banking services like lending and payment functions. But they can do so without going to a traditional financial institution like a credit union. As noted in introductory material found on Ethereum.org, “Ether is the cryptocurrency used to pay for computing services on the Ethereum blockchain.” It is an asset used to pay for the transactions facilitated by the Ethereum technology and its associated applications.

That said, these new technologies do not always have to be used together. NAFCU’s Regulatory Approaches to Financial Technology whitepaper suggested that credit unions and other institutions might be able to use DLT to address compliance concerns:

“For transactions or services that require detailed documentation, blockchain technology could mitigate certain compliance burdens because blockchains are, in practical terms, immutable records. For regulators who perform auditing functions, this high level of data integrity may accommodate less burdensome compliance monitoring and minimize the use of manual processes to establish identities or verify transactions. Some technology firms have already developed proof of concept applications that utilize blockchain to address know your customer (KYC) and anti-money laundering (AML) requirements.”

NCUA’s primary goal for the RFI was self-education. It wanted to discover how DLT, DeFi, and digital assets are being used by credit unions or how credit unions plan on using them. NCUA noted that this knowledge can help it ensure that credit unions that are using these new technologies can do so in a safe and sound manner. NCUA’s RFI included several questions that are more thoroughly explained in the Regulatory Alert, and those questions were organized into six different topics:

• How credit unions currently use or plan on using DLT, DeFi, or digital assets?
• What are the pros and cons of engaging with nonaffiliated third parties rather than credit union service organizations to implement the use of DLT, DeFi, or digital assets?
• How can credit unions manage risk that may arise because of the use of DLT, DeFi, or digital assets?
• What is needed from NCUA so that credit unions can use DLT, DeFi, or digital assets in providing products and services to members (e.g., supervisory concerns)?
• Are there share insurance issues that need to be clarified for credit unions to use DLT, DeFi, or digital assets?
• Are there any other issues that NCUA needs to be aware of when considering the use of DLT, DeFi, or digital assets by federally insured credit unions?

NAFCU members who would still like to submit comments on the RFI to NAFCU can do so through the link above.