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The Case For A Bitcoin Credit Union

Bitcoin has grown impressively in the past few years, yet still faces a number of significant hurdles before widespread adoption becomes a reality. The lack of a centralized entity is one of Bitcoin’s core strengths, but lack of an accountable entity beyond every individual for storage of wealth will make many uncomfortable holding such a currency. Even simply exchanging traditional fiat for bitcoin remains a time consuming, expensive and confusing obstacle for many.

In this article, we’ll explore how a decentralized credit union could solve those issues, as well as provide a series of other significant benefits to the bitcoin community.

Establishing Trust

We would likely all be astounded if we knew just how many bitcoins were lost forever, yielded unrecoverable due to user error and mismanagement of wallets. So long as a single human is required to be the sole source of access to their funds this will continue to happen, making onboarding and retaining new bitcoiners perpetually challenging.

Companies like Coinbase have done a great job building a separate account layer on top of wallets to make the user experience more manageable. This enables people to transact in bitcoin without having to worry about which wallets to use. That, along with the notion of password reset via email are basic expectations of familiar banking institutions. Those are a great start, but there are abundant additional services the bitcoin community will soon require that could only be achieved with a registered financial institution.

Deposit Insurance

Bitcoin is not revolutionary because it makes you your own bank, it’s revolutionary because it gives you the option to be your own bank. For many people, that is simply not an attractive proposition because they are not confident enough in their technical prowess to manage such a task.

In addition to reducing the technical complications around wallet management, accounts held with registered financial institutions provide a level of comfort unattainable on an individual level, not the least of which is insurance on deposits. In the U.S., the FDIC and NCUA insure deposits up to $250,000 in banks and credit unions, respectively. That level of comfort makes people confident holding money at an external institution, or in the case of bitcoin, in the currency itself.

Deposit Interest

Right now there are some 11M BTC outstanding with a combined value of approximately $1.3B, the overwhelming majority of which are sitting in wallets, draining evermore liquidity from the global capital markets. The traditional retail banking model uses deposits for investments, offering capital to expand external business ventures while providing a return to depositors. Beyond traditional money market accounts and CDs, this could also serve as a way to promote large scale, opt-in bitcoin investment vehicles to help new bitcoin companies grow their operations.

Bitcoin Debit Card

Registered banks and credit unions have the ability to issue debit cards – the implications of this could be tremendous. You could carry a standard magnetically-striped card in your wallet for use with legacy point of sale (POS) systems. Once swiped, the merchant would be paid in traditional currency, while an equivalent amount of bitcoin is deducted from your deposit account and swapped on an exchange to reimburse the bank / credit union.

Currently, the hurdle for merchants to accept bitcoin is the requirement not only for the customer to hold BTC, but also the need to have a POS system already set up to accept BTC. With the debit card model, the merchant wouldn’t even have to know the customer is paying with BTC. The transactional cost savings compared with a BTC-to-BTC transaction would be drastically reduced in the debit card scenario described, but this payment method would circumvent many of the difficulties during the current bitcoin proliferation period. Eventually, with updated payment processing software at the merchant servicer level, this could easily translate into a convenient BTC-BTC payment method without required software or hardware updates for merchants.

Exchange Services

With the regulatory clarification recently issued by FinCEN defining persons who exchange traditional currency for bitcoin as a Money Transmitter – a title that requires an abundance of compliance and expensive surety bonds – common methods for obtaining bitcoin have been removed. A registered financial institution would provide a trustworthy, legal and dependable solution to this issue.

Exchange services could take on a number of convenient embodiments. In addition to the most basic online solution, credit unions can access the interbank network, meaning capital or exchange could easily be made available by pre-existing ATMs. Even without ATMs or the credit union headquarters nearby, exchange services could still be made possible. Shared branching would enables members to transact with credit unions at thousands of locations.

Possibly the most accessible option would be to onboard independent agents. Similar to the way independent mortgage brokers can underwrite from their homes, registered (and, of course, pre-screened) agents of the credit union could serve as a local access point without additional overhead costs. The infrastructure already existing within network could be easily translated into this new, legal exchange network.

Bank vs. Credit Union

A credit union would provide unique benefits over banks for the purpose of helping the bitcoin community grow. Most notably, credit unions are member-owned (rather than shareholder owned) which means the mandate of the establishment would be to aid bitcoin proliferation over generating exorbitant exchange or transaction fees. Additionally, the costs of obtaining a federal charter for a credit union are generally far lower than banks or bank holding companies. The National Credit Union Administration estimates approximately $150K to establish and $350K in annual costs for a full service operation.

Regulatory Capitulation

Both the benefits and costs of establishing a legally-recognized financial institution would have to be examined carefully. A series of past frauds that avoided registration have ended in disaster and current unregistered organizations look untrustworthy at best. Accountability to a regulators, as much as it has been consciously avoided to date within the bitcoin community, would make average consumers far more comfortable.

For better or for worse, regulatory accountability is two-directional. Know Your Customer (KYC) regulations and a series of other anti-money laundering rules require financial institutions to collect at least basic identity information about their clients, sometimes more depending on the types of accounts and financial instruments used. In a currency with a public transaction ledger, as soon as the government can map an individual to a wallet, they can track all of that individual’s financial transactions. They would likely need a warrant or subpoena to obtain wallet addresses associated with a particular account, but that has not proven to be an arduous feat for gaining access to traditional bank accounts in recent years.

The notion of bitcoin accounts at a credit union or other financial institution will not suit everyone. There are those who love being their own bank, managing their own risk and remaining completely anonymous. While that segment of the population is important, there remains an under-served segment that would find bitcoin appealing with more traditional protections and regulations in place. The incredible thing about bitcoin is that both options can coexist.

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