Letter clarifies agency’s expectations for credit unions in using distributed ledger technologies; ‘good judgment’ at the top

Clarifying certain expectations for credit unions contemplating the use of new or emerging distributed ledger technologies (DLT) is the focus of a letter issued Wednesday to all of the federally insured cooperatives insured by the federal credit union regulator.

In its letter to credit unions (22-CU-07), the National Credit Union Administration (NCUA) said it does not prohibit credit unions from developing, procuring, or using DLT – if it is deployed “for  permissible activities and in compliance with all applicable laws and regulations, including applicable state laws or state supervisory authority requirements.”

The agency added that it recognizes new technologies may transform how credit unions perform traditional financial operations and services. However, it advised credit unions to be alert to new or evolving risks posed by use of an emerging technology or approach.

“The NCUA expects credit unions to exercise good judgment and apply sound risk-management practices when choosing to offer a new platform, product, or service, including where DLT is part of the underlying technology,” the agency said. “These reviews include evaluating the permissibility of the activity itself and the opportunities and risks associated with any underlying technology, such as DLT.”

The agency said its examiner evaluations regarding DLT will be based on the rigor with which credit unions exercised good judgment, applied sound risk management, and “executed compliance and risk oversight of acquisition or development and deployment of new systems and technology.”

The letter outlines governance, oversight and planning approaches for credit union boards to consider when employing DLT. It also offers risk and risk mitigation strategies for credit unions to consider (including information and cybersecurity, legal and compliance, strategic and reputation, liquidity, and third-party risks).

“The NCUA supports innovations that are safe and sound, in compliance with all applicable laws and regulations, and fair to consumers,” the letter stated. “The NCUA also believes that DLT-related activities are rapidly evolving, and present questions and evolving risks not yet well understood. The NCUA reserves the right to issue future guidance, as appropriate.”

Letter to Credit Unions (22-CU-07) Federally Insured Credit Union Use of Distributed Ledger Technologies