U.S. Credit Unions Embrace Tokenization of Real-World Assets
Traditional banks may still dominate the financial industry in terms of assets held, but credit unions are gaining popularity as an alternative option for eligible Americans. Recent data shows that there are approximately 4,600 credit unions in the United States. According to a September 2023 report from The National Credit Union Administration (NCUA), the number of Americans who are members of federally insured credit unions has increased by 20% in the past five years, reaching nearly 139 million. Furthermore, the credit union market size, measured by revenue, totaled $126.2 billion last year.
Credit Unions and Tokenization of Real-World Assets
John Wingate, Chief Executive of financial platform BankSocial, explained that credit unions are member-owned banks, unlike for-profit banks that are owned by shareholders. He highlighted that the ethos of credit unions aligns well with the decentralized finance (DeFi) ethos. However, credit unions face challenges that could hinder their future growth.
Kyle Hauptman, Vice Chairman of the NCUA, revealed that credit unions engage in a cumbersome process called “loan participations,” wherein ownership interests in a loan are divided and sold. He acknowledged that the current loan participation process is complex, creating difficulties and uncertainties for credit unions that buy participation in the loan.
Tokenization Use Cases
Hauptman suggested that tokenizing loans that are not large enough to be securitized in a bond offering could be beneficial. He explained that a smart contract could automatically pay the buying credit union their share, eliminating the need for constant inquiries about payment.
Ravi de Silva, Managing Partner at compliance risk management firm de Risk Partners, stated that tokenization could help manage compliance risk by providing transparency, security, and efficiency. Tokenization could be particularly helpful for credit unions in anti-money laundering (AML) use cases. Tokens can be used as unique identifiers to track transactional patterns and detect anomalies. Additionally, tokenization can securely store and reference customer identification data, which is a requirement under AML regulations.
Credit Unions Adopt Tokenization
Given the potential benefits of tokenization for credit unions, it comes as no surprise that some institutions have begun implementing these solutions. BankSocial, for example, is working with several credit unions to tokenize identity and facilitate interoperability between systems, fintechs, and bank accounts. Great Lakes Credit Union has already implemented BankSocial’s Real-Time Payment Solution, which uses Hedera Hashgraph’s distributed ledger technology (DLT) to tokenize payments and deposits for peer-to-peer transactions on the Hedera network.
Metallicus, another blockchain company, is also collaborating with credit unions to enable blockchain-based solutions. The Metal blockchain, developed by Metallicus, allows banks, credit unions, financial institutions, and fintechs to create interoperable ledgers that can communicate seamlessly.
Credit Unions Embrace Tokenization, but Concerns Remain
While some credit unions have begun exploring tokenization use cases, regulatory concerns continue to pose challenges. Hauptman emphasized that credit unions are unsure whether tokens are considered securities, which creates uncertainty. Additionally, credit unions are concerned about the KYC processes and the platforms that custody tokens.
Despite these challenges, Hauptman believes that U.S. credit unions are better positioned to implement tokenization use cases compared to U.S. banks. The NCUA has provided guidance that offers clarity on regulations for credit unions, including reports on digital assets, relationships with third parties, and the use of distributed ledger technologies.
Credit Unions Should Collaborate with Compliance Teams
De Silva suggested that credit unions can overcome regulatory challenges by demonstrating how tokenization is implemented, monitored, and audited. He emphasized the importance of continuous monitoring, risk assessments, and staying updated on evolving regulations to ensure compliance. Additionally, credit unions should work closely with compliance teams to adopt industry best practices for tokenization while prioritizing the security and privacy of customer data.
