Having spent some time last week with some CU folks, I've come to the conclusion that Bitcoin may be the most appropriately named product/service ever. Because most folks either understand a bit, a little bit or not a bit about what proponents keep calling the "currency of the future."
And perhaps it will indeed be, but for the present I can tell you there is a Mt. Gox-sized e-vault stuffed with uncertainty and misunderstanding (although not those missing bitcoins), and I admit that I include myself among their number.
After listening to an hour-long discussion on Bitcoin I realized it isn't the concept that I — and others who were part of the talk during the recent NACUSO annual meeting — don't really understand; it's the reality. Specifically, why anyone would put their faith (and actual currency) into what is essentially a piece of software that is not regulated by any government, is backed by the full faith and trust of the Internet, can fluctuate wildly in value, was created by a mysterious group, can be hacked, and can just — poof — go missing. (The bitcoin exchange Mt. Gox initially reported it had "lost" 850,000 bitcoins but then later said it had "found" 200,000 of those, but losses remain in the hundreds of millions of good old-fashioned dollars.)
An Introduction, But...
The discussion at NACUSO's recent annual meeting was led by Todd Erickson, COO at First Flight FCU in Cary, N.C., and a member of the Regulatory Affairs Committee of the Bitcoin Foundation, who did a nice job introducing about 75 people to the world of Bitcoin (it's capital B for the exchange, lower case b for the "digital currency units" themselves). By a show of hands, no one in the room said they had ever conducted a bitcoin transaction, and Erickson showed how easy it is by transferring $10 to one audience-member's cellphone (or at least it was the equivalent of $10 at the time). But many of the people I talked to, including one regulator, were still a "bit" more than perplexed when the session concluded.
If all the impediments to digital currencies are ever overcome — and they are legion (and just wait until some sort of Dodd-Frank for such currencies comes along in the U.S. or the EU), there is a big existential threat here for CUs. As Erickson explained, Bitcoin is a "purely peer-to-peer version of electronic cash that allows online payments to be sent directly from one party to another without using a financial institution." It's seems like the ultimate in disintermediation.
And yet even though there have been actual physical bitcoins minted (also unregulated) and there are even a handful of bitcoin ATMs (ironically, at least one you can withdraw cash), people are still buying and selling digital currencies using the old-fashioned kind. That led one state regulator I spoke with to conclude that for now Bitcoin isn't a currency but an (anonymous) payment stream. Erickson's take is that "with Bitcoin, the transfer of payment and the storage of wealth is the same thing."
It makes me wonder how long it will be before someone embezzling from a CU converts stolen cash into bitcoins? Investigators will likely find themselves flummoxed attempting to track down missing funds.
Despite more hurdles than a track meet, virtual currencies are likely here to stay. Bitcoin, said Erickson, is already larger than funds transferred via Western Union, and is nipping at the heels of Discover and Paypal.
What does it all mean to credit unions? Erickson outlined 10 different potential revenue streams from Bitcoin that may be available to CUs, such as mobile wallets and e-vault services, but for many those seem a way off. And more than just a bit.
- Meanwhile, speaking of confusion, my column in the April 21 issue my have caused a little. So let me clarify. In writing about risk-weighting under NCUA's new risk-based capital proposal, I edited out a couple of sentences prior to going to press that should have been included, and could have given some readers the wrong impression (and this is above and beyond the usual wrong impression typically found here).
Yes, the risk-weighting assigned a CUSO investment under the proposal is 250%. However, under NCUA's risk-based formula, that actually works out to a capital equivalent of 26.25%. In my column last week, where I made a mistake was in using an example of a $5,000 car and the perception among many at NACUSO that that would require $12,500 to be reserved. That's my mistake for not being clearer about all the misundertanding over what the risk-weighting will really mean on balance sheets.
A Video Tutorial
NCUA has acknowledged it has encountered similar misconceptions and has created a video at
Under the formula, in the case of the car, were it a CUSO you'd have to reserve $1,312.50. Even at the lesser amount that still has plenty of folks chapped, especially if an investment in a CUSO has already been paid back. Want to offer your thoughts? The comment period runs through May 28.
Frank J. Diekmann can be reached at
