Posts tagged ‘crypto currency’

Bitcoin is Dead.  Long Live the Bitcoin!

With an impeccable sense of timing, last Tuesday I gave a presentation on the future of virtual currency at a chapter event in which I proclaimed that the technology is going to fundamentally change the way banking is carried out only to read headlines the next morning detailing how investors are running for the exit when it comes to virtual currency. 

A colleague of mine who was at the event even emailed me to ask me if I wanted to change my opinion: my answer is a resounding No.  To be clear, many virtual currencies will go the way of the tulip in 17th century Holland, but the technology makes so much sense that in the coming years, financial institutions will either have to adopt it as their own or be left behind. 

When we talk about virtual currency, it’s important that we all agree on the terms to be used, particularly in the absence of regulatory definitions.  When I’m referring to virtual currency, I am talking about an electronic store of value which is traded electronically using Distributed Ledger Technology (DLT).  By DLT, I am referring to a system of network computers which validates transactions involving virtual currencies using advanced cryptography without the use of a third-party intermediary.

I have no idea what the bitcoin is going to be worth a week from now; but I do know that, as we speak, companies large and small are thinking of ways to apply DLT.  For example, imagine a world in which the job of the county clerk to record home purchases and liens is usurped by DLT which creates a chain, which everyone can access, recording every single transaction involving that piece of property. Imagine a world in which overdraft transactions are a vestige of a bygone era because transactions are executed immediately. 

This is also a world in which there is less and less need for third party intermediaries such as credit unions.  Remember, a DLT network validates and records transactions. 

But this is not one of those “credit unions are obsolete” blogs.  Instead, for those of you who understand the technology, there are many things you can do to integrate your institution into this new technology and benefit your members along the way.  For example, the OCC has already authorized banks to act as electronic wallets– effectively, safety deposit boxes – for consumers who want a central place to store those passwords and electronic keys they need to access all those transactions recorded on those distributed ledger chains.  In addition, this technology will make the NACHA network about as antiquated as rabbit ears on a black and white television. 

The bottom line is: even as you chuckle at that crazy cousin who just lost all that money investing in a virtual currency which exists only in cyberspace, keep on planning for a world in which the technology that powers that, currency changes the way virtually all important financial mediation is done. 

May 17, 2022 at 9:32 am 1 comment

Getting Ready For The Legislature’s Stretch Run

Yours truly is back from his Carolina vacation and has caught up with enough e-mail to finally post again.  While there is a lot I want to get off my chest – there is only so much my wife wants to hear about the banking industry during an eight-hour car ride – I think I will start with a description of some of the key legislative and regulatory issues that will be impacting New York state credit unions in the coming weeks. 

Not only is this an election year, but it is an election year following the redrawing of the election map, meaning that the legislature will want to get out of town as quickly as possible, especially with primaries scheduled for June. 

One of the most important issues we are dealing with is a bill that would retroactively impose strict new requirements on lenders foreclosing on property (S5473D Sanders).  As many of our members have already explained to their representatives during our state GAC, as currently drafted, the retroactive application of this bill and the ambiguity regarding the right of lenders and borrowers to negotiate modifications without running out of time to foreclose on property will actually make it more difficult to work with delinquent borrowers.

We are also continuing to advocate for changes to a proposed data portability and privacy bill which does not currently exempt financial institutions (S6701A Thomas / A680B Rosenthal) as well as continuing to express a strong opposition to state level anti-trust legislation (S933A Gianaris) which could negatively impact the ability of credit unions to help provide communities banking services, particularly in underserved areas. 

All this is taking place as New York’s highest court hears an appeal of a case challenging the legality of New York’s redrawn Congressional map which could allow Democrats to pick up four additional seats as they struggle to keep their majority.  Expect a decision to come down shortly.

As for the federal level, there is an interesting article in today’s WSJ reporting that privacy legislation may finally be getting traction in Congress.  This is potentially good news, provided the legislation does not impose additional requirements on credit unions and the legislation preempts state law.  But I still remain skeptical that Congress will be able to get legislation done this year.  Hopefully, I am wrong.

On the regulatory front, we are still waiting to see what will come out of the CFPB’s initiative against so-called “junk fees”.  The president of the American Bankers Association has already taken to publicly accusing the Bureau of going rouge.  My bet is that we are going to be hearing a lot about overdraft fees in the coming months. 

Last, but not least, let’s hope that the NCUA is going to be following up on its reach-out to credit unions by providing additional guidance as credit unions begin to explore the banking issues raised by distributed-ledger technologies and cyber currencies.  On May 11th yours truly will be discussing the state of regulation in this area and how it is going to impact your credit union as part of the Southern Tier’s Spring Chapter Event in Binghamton.  I noticed it’s at an Irish pub, so let’s share a half-and-half as we ruminate on how technology is once again upending the way banking is done.

Full disclosure, my wife and kids won’t be attending.  They already heard enough about how the NCUA needs to move more quickly and provide additional guidance in this area.  It was one of my favorite topics as we drove around North Carolina.

April 27, 2022 at 9:57 am Leave a comment

CDFIs, DFS Among the Winners In State Budget

With one eye on the final round of the Masters, yours truly did an initial review of the legislation included in New York’s budget plan for this fiscal year and my initial take is that CDFIs and the Department of Financial Services are among the biggest winners.  This is of course good news for those New York State chartered credit unions which have CDFI designations. 

Last year the Association was successful in getting legislation passed allowing credit unions to participate in the Excelsior Linked Deposit program.  This program allows participating lenders to receive state deposits in return for making subsidized low interest loans to eligible small businesses.  Language included in the budget makes any loan involving a CDFI eligible for the program.  The budget also makes CDFIs eligible to receive loans.  This is a huge incentive for CDFI credit unions to get qualified to participate in the program.  Give me a call if you want to further discuss potential opportunities. 

As Washington dithers over how best to regulate crypto currencies, New York moved decisively to give DFS regulatory power over those portions of the industry based in New York.  The budget amends the Financial Services Law to authorize the DFS to examine “persons engaged in the virtual currency business” and to make the industry pay for the cost of such examinations, just like other state regulated institutions currently do. 

What is also striking about this new power is that DFS is also given the authority to promulgate regulations defining what entities are going to be subject to this new framework.  While this type of regulatory handoff is normal in Washington, it is unusual in New York where a new authority such as this would typically be accompanied with a detailed statute. 

Finally, the legislature approved the creation of a $250M public/private fund for the purpose of providing money for social equity licensees who are seeking to open retail cannabis businesses.  This is a smartly drafted piece of legislation since it permits the state to enter into subleases with cannabis retail businesses.  One of the key challenges for businesses where cannabis has been legalized is acquiring retail space. 

Of course, this just underscores yet again why the federal government must act on the SAFE Act, but you folks already know how I feel about that.   

Perhaps Masters winner Scottie Scheffler would be interested in contributing to the state cannabis fund.  His Masters win is his fourth tournament victory in six weeks, a feat that has been worth approximately $8.6M.  Not bad for a 25 year old.   

April 11, 2022 at 9:23 am Leave a comment

NCUA Dips Its Toes Into The cryptocurrency Waters

In late December, NCUA issued its most significant guidance to date on cryptocurrency, explaining in this letter to credit unions that federally insured credit unions can facilitate third-party relationships between cryptocurrency providers and their members pursuant to the incidental powers of federal credit unions. At the same time, however, it detailed some of the classic third-party considerations that credit unions must consider when establishing relationships offering non-depository financial products and reminded state-chartered institutions that NCUA’s green light is subject to state law.

In recent months, yours truly has used this space to urge NCUA to follow the lead of other financial regulators and detail the conditions upon which financial institutions can enter the cryptocurrency space. While a much more rigorous framework needs to be provided, this opinion letter clarifies that credit unions can start working with third parties who may be approaching them about marketing various cryptocurrency services. The good news is that credit unions can approach these discussions the same way they approach any other discussions with third parties, but the guidance makes clear that this is an area to handle with care. Credit unions are expected to adhere to a documented, rigorous third-party oversight process that demonstrates an awareness of the compliance and legal risks associated with cryptocurrency. 

Accordingly, I would pay special attention to these following reminders offered by NCUA:

When selling, advertising, or otherwise marketing uninsured digital assets to members, members should be informed that the products offered:

  • are not federally insured;
  • are not obligations of the FICU;
  • are not guaranteed by the FICU;
  • are or may be heavily speculative and volatile;
  • may have associated fees;
  • may not allow member recourse; and
  • are being offered by a third party.

One final note: Don’t be penny wise and pound foolish. Have an attorney involved in the contract drafting process and make sure the credit union is adequately protected in the event that the crypto craze ends up being the modern day equivalent of the Tulip Frenzy.

January 13, 2022 at 9:19 am Leave a comment

Digital Currencies Will Make BSA Compliance Easier

In yet another sign that Facebook has grown too large for Mark Zuckerberg’s skill set, the Wall Street Journal reported Tuesday that Facebook’s ambition to create a cyber currency called Libra, in association with a group of large banks and payment processors is losing momentum. The paper reports that would-be investors are backing away from the project in the face of stiff opposition from regulators. For those of you who just don’t like Mark Zuckerberg, or who fear that a cryptocurrency is yet another on the ever-growing list of putatively existential threats facing the industry, this is good news. For those of us who believe that the reactionary rejection of Facebook’s idea is based more on ignorance than legitimate regulatory concerns, this is too bad.

What really got me fired up was this paragraph in the WSJ article: “government officials and central bankers were quick to criticize the project, citing concerns about how the network would protect users’ privacy and prevent criminals from using it to launder money.” In fact, a well-functioning digital currency system will greatly reduce money laundering. Here’s why.

Labor and bitcoin technology are based on distributed ledger technology. With apologies to IT people who will probably cringe at this explanation, the basic idea of distributed ledgers is that software converts each new digital transaction into a unique digital block which is added to a block chain produced by previous transactions. The technology has the ability to simplify everything from contracts to land title searches by creating a single chain of evidence that can be accessed from multiple computers. For example, let’s say that contract you are entering into requires a wet signature. If you could enter into that same contract using block chain technology, both parties to the agreement would have instantaneous and unequivocal proof that the contract has been signed and agreed to. Legislation has even been introduced that would preempt state laws seeking to prohibit the use of block chain technology in commercial transactions.

Nevertheless, regulators continue to argue that block chain technology raises dangerous Bank Secrecy Act concerns. In fairness to the regulators, the technology could be abused. After all, bitcoin is a favorite tool of money launderers, extortionists, and black market entrepreneurs. The bitcoin’s appeal, however, is that it enables the bad guys to exchange electronic currencies without meeting each other or exchanging identifying information, such as an account number. So long as both parties can confirm that a new link in the block chain has been created, they can process transactions in virtual anonymity.

However, this problem can be easily addressed, which is why we are seeing the growing use of this technology. Regulators can mandate that legally sanctioned cryptocurrencies come with electronically identifying marks that make it clear which parties are engaging in a transaction. Furthermore, this electronic confirmation can be more secure than existing BSA compliance, which at the end of the day remains reliant on documents that can be doctored as well as staff people who are, after all, only human. Let’s also keep in mind that nothing is better suited for money laundering than paper currency payable on demand, no questions asked. Furthermore, digital currency is worthless unless a business accepts it. There will still be a need for banks and credit unions that are willing and able to convert digital currencies into cold, hard cash.

So, if you want to dislike Libra, go ahead. But let’s not let regulators throw obstacles in the way of digital innovation that don’t need to be there. The quicker we get to the widespread use of cryptocurrency, the quicker we will have more efficient and safer payment systems.

October 4, 2019 at 12:07 pm Leave a comment

Why Facebook’s Currency Is a Good Idea

The most interesting and potentially consequential thing that happened over the holiday week was that the House Financial Services Committee sent a letter to Facebook’s CEO formally requesting that he put the brakes on their plans to introduce libra, a cyber currency which Facebook plans to administer along with 24 other companies including PayPal and MasterCard.

According to the Luddites, I mean Congressmen, the proposed new currency and digital wallet which Facebook plans to start offering the middle of next year. Facebook’s proposal involves massive “risks” on an unprecedented scale. In addition, the crypto currency could provide an “under regulated platform for elicited activity and money laundering.” Hearings will follow shortly.

It’s time for everyone to take a deep breath and come back down to Earth. The plans of Facebook and its partners are the logical inevitable evolution of currency. In addition, in the short to medium term this has very little to do with creating a revolutionary new currency and almost everything to do with capturing a larger portion of payment transactions. This is a big deal but hardly revolutionary.

First, the only reason we use paper currency today is because crypto currency wasn’t around thousands of years ago when we started seeing a large scale need for the secure exchange of credit that businesses and consumers could rely on. Currency is nothing more or less than a contract, albeit one backed by the full faith and credit of governments, that the paper you have in your pocket will be accepted and honored by the total stranger down the street.

In many ways it has become grossly inefficient. In his book “The Curse of Cash” Professor Kenneth S. Rogoff points out that contrary to popular belief “demand for most advanced country currency paper notes has been rising steadily for more than two decades” precisely during the time period you would expect debit cards to be making money obsolete. According to Kenneth S. Rogoff, by the end of 2015 1.34 Trillion worth of US currency was being held outside US banks. Furthermore, the bulk of this cash is in denominations of $100 or more. This is not an abstract problem. India’s Prime Minister was so concerned by the use of high denomination currencies to facilitate illegal activity that he literally took large denominations out of circulation.

And let’s all stay calm. Facebook’s “currency” is only going to be valued to the extent that it can be converted into common currency. What is so telling to me about Facebook’s announcement isn’t that Facebook wants to create a crypto currency but that its founding members include MasterCard, PayPal and Visa, companies that specialize in facilitating transactions. What really is going on here is not some idealistic quest to create a world without cash but rather an aggressive and smart business move to take a larger chunk of the money to be made off facilitating business transactions. This isn’t something to be feared, it is the free market at its best. If they succeed we will have a better, safer system and if they don’t, all the armchair reactionaries can say I told you so.

Does this represent a threat to your credit union? Yes it does. But the threat is no different than any other multitude of other challenges confronted by the industry as technology once again revolutionizes the way banking is done.

Which brings me back to the Luddites. I would have a lot more sympathy for regulators and our elected representatives if they didn’t insist on moving so slowly in updating our payment system. What Facebook is doing is commonsensical to anyone with a smartphone. I can now go weeks without going to an ATM secure in the knowledge that so long as my smartphone is charged up I can just about pay for anything I need. In fact, Sweden   has already gone a long way towards  phasing out cash. If anything, Facebook’s innovation is, if anything, long overdue.

July 8, 2019 at 9:04 am Leave a comment

Facebook Has A New Pen Pal: The Senate Banks Committee

On Friday, the Chairman and Ranking Member of the Senate Banks Committee sent a politely worded letter to Facebook inquiring about its plans to move aggressively into the payments market by offering its users the opportunity to buy products directly from merchants using a Facebook backed coin or cryptocurrency depending on how nefarious you want to make its plans sound.

Why is this a big deal? Well how much money do you make off credit and debit card transactions issued by your credit union? If Facebook successfully integrates the coin payment platform into its infrastructure this would mean that 1/3 of the world’s population could start using Facebook to facilitate purchases, making Facebook an overnight threat to Visa and MasterCard.

In their letter to Facebook, following an article describing Facebook’s plans in the Wall Street Journal, the Senators explain that in addition to Facebook’s cryptocurrency ambitions, “privacy experts have raised questions about Facebook’s extensive data collection practices and whether any of the data collected by Facebook is being used for purposes that do or should subject Facebook to the Fair Credit Reporting Act.”

As with so many other aspects of its growth Facebook is somewhat clumsily taking aim at the financial sector. In addition to questions about its cyber currency ambitions, it is currently being sued by HUD over claims that it violates its advertising platform allows lenders to effectively engage in digital redlining by choosing such finely tuned demographic target audiences in such a way that lenders can avoid offering financial products and services to minorities.

Assembly To Hold Municipal Deposit Hearing Next Monday

In case you haven’t heard, the Assembly Banks and Local Governments committee will be holding a hearing on municipal deposits next Monday. An assortment of credit union, bank and local government organizations have been invited to testify. This is a key opportunity for credit unions to respond to banker municipal deposit myths and finally allow public tax dollars to be placed in those financial institutions where they will most benefit taxpayers.

Department of Treasury Issues OFAC Guidance

I’ve been analyzing this guidance for a couple weeks now trying to figure out how significant it is and why it was issued in the first place. It seems to me that nothing in this release should be a surprise to anyone who has tried to comply with OFAC which I’m assuming almost all of my faithful readers have. Nevertheless, any time the Department of Treasury comes out with guidance on this issue you should read it and compare your practices with those expected by the regulator.

May 13, 2019 at 8:45 am Leave a comment

Are We Getting Closer To Legalizing Cannabis Banking?

Image result for marijuana bankingA dogs and cat coalition with supporters on both ends of the political spectrum may be coalescing around a proposal that would provide a framework for credit unions and banks to provide marijuana banking service without fear of violating federal law.

Under a proposal put forward by Senator Cory Booker of New Jersey and Elizabeth Warren of Massachusetts ‘‘Strengthening the Tenth Amendment Through Entrusting States Act’’ or the ‘‘STATES Act’’. it would be legal as a matter of federal law to sell, possess and distribute marijuana in states where it is legal to do so. This would presumably provide both banks and credit unions the green light to provide banking services to marijuana businesses. It would also presumably eliminate the opposition of at least some Federal Reserve banks to processing transactions for banks and credit unions offering these services.

There are few things that New York Governor Andrew Cuomo and President Trump agree on these days but in separate statements they have both indicated that they support the legislation. Specifically Governor Cuomo signed onto a joint letter with several Governors which complained in part that “current federal law precludes banks from engaging with legal entities that are complying with state laws. As a result, these companies are forced to become cash-only businesses, creating unnecessary burdens and risks.” This is a big development coming from a Governor who has taken a very cautious approach to the legalization of marijuana.

As for President Trump, before heading to Canada to see how many erstwhile American allies he could antagonize prior to  embracing North Korea’s dictator, he told reporters that he would “Probably end up supporting” the Booker/Warren proposal.

Wells Bans Credit Card Purchases of Crypto Currency

This one is getting a lot of attention this morning. $2 trillion asset Wells Fargo became the latest of the behemoths to ban their credit card holders from using their credit cards to make transactions at crypto currency exchanges and brokerage firms. Wells explained that it is making the decision in part “due to the multiple risks associated with this volatile investment.” JP Morgan Chase, Bank of America and Citi Group have already made similar announcements.

June 12, 2018 at 8:36 am Leave a comment


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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