NCUA to Credit Unions:  Explore Distributed Ledger Technology, But Be Very, Very Careful

May 27, 2022 at 9:26 am Leave a comment

As I was reading NCUA’s industry guidance, giving credit unions the green light to explore the potential uses of Distributed Ledger Technology (DLT), I was  reminded of the scene in Young Frankenstein where Gene Wilder’s Dr. Frederick Frankenstein  and his assistant, Marty Feldman’s Igor, are about to go down to a dungeon from which they hear mysterious noises; Igor says “Master, it might be dangerous, you go first.” 

Now, don’t get me wrong.  I am not minimizing the importance of the letter and I think NCUA deserves credit for coming out with this opening guidance.  It accomplishes two main goals.  First, it ensures that credit unions can at least explore the potential uses of DLT without running afoul of their regulator.  Secondly, as explained by the Agency, “[t]his letter also signals to the broader financial and technology communities that credit unions are a market to consider when designing products, considering partnerships, or making investments.”  This is a particularly important announcement for an industry comprised of institutions who will almost all have to work with vendors. 

On the one hand, NCUA recognizes that credit unions have to feel free to consider using DLT, the problem is that no one knows precisely what those uses are going to be or how they may evolve.  As a result, NCUA’s letter is understandably simply a first step in what promises to be an increasingly complex regulatory process, and any credit union thinking seriously about integrating DLT should make sure they do so only after working with their regional regulators.   

Nevertheless, for those of you looking for specificity at this point, you will be disappointed.  Most notably, the memo does not provide a definition of DLT; instead, it includes a footnote providing further background information from other sources including information from the National Institute of Standards and Technology.  The information provided by these sources will create as many questions as answers for those of you in charge of evaluating this issue. 

As I have explained in this blog, virtual currencies may come and go quicker than Elon Musk can decide to buy Twitter and then announce he doesn’t want to buy Twitter, only to confirm that he does want to buy Twitter, but DLT is going to transform any industry that stores and transfers information.  It provides a mechanism for a network of computers to confirm and store proof of transactions without the need for third parties such as credit unions and banks.

Nothing else in the guidance should surprise you.  Similar to the letter released earlier this year authorizing credit unions to partner with third-party virtual currency vendors, the letter emphasizes the need for due diligence and compliance with all applicable state and federal law.  This means that even though this guidance applies to both federal and state-chartered institutions, state charters should also reach out to New York’s Department of Financial Services to clarify the conditions under which they can provide similar services. 

On that note, enjoy your three-day weekend.  Next week is the end of the State Legislative Session so stay tuned for any updates and recaps that the Association will be providing in the days ahead. 

Entry filed under: General, Regulatory, Technology. Tags: , , , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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