Blockchain isn't just for Bitcoin. And credit unions are taking notice.
Although blockchain is the technology that underpins the digital currency making headlines around the world, it can be used for a lot more. And while credit unions have only embraced blockchain in recent years, more are doing so.
Right now, the blockchain benefits are still mostly potential for credit unions, but they are also numerous. Credit unions can use blockchain to facilitate and secure settlement, more easily keep and maintain records and help manage customers' identities.
What Is Blockchain?
Let's set the table for the discussion. What is blockchain?
The two concepts underpinning blockchain are "business network" and "ledger." Taken together, these are what make blockchain a smart, tamper-resistant way to conduct trade, transactions and business processes. Network members exchange assets through a ledger that all members share access to. The ledger is synced across the network with all members needing to confirm a transaction of tangible or intangible assets before it is approved and stored on the blockchain. This shared view helps establish legitimacy and transparency, even when parties are not familiar with one another.
A white paper from payments consultancy Glenbrook Partners and PSCU, a Credit Union Service Organization (CUSO), also helps add some definition to the term. The white paper notes that blockchain is "ideal for recording transaction histories, ownership records — almost anything associated with value."
Credit Unions Embrace Blockchain
More and more credit unions are jumping on the blockchain bandwagon. In August, the credit unions that support the CULedger blockchain initiative formed a CUSO called CULedger, LLC. As CoinDesk notes, a CUSO "is a business entity, typically owned by a group of federally chartered credit unions, that provides certain services such as business loan originations or payment card processing."
CULedger started in 2016 as a project between the Credit Union National Association and the Mountain West Credit Union Association to develop a concept for a credit union systemwide permissioned distributed shared ledger platform. The endeavor now includes credit union consulting firm Best Innovation Group, PSCU and other credit union system partners.
Meanwhile, the National Association of Federally-Insured Credit Unions announced in October that it would become the first U.S. financial trade association to join Hyperledger, an open-source blockchain collaboration effort hosted by the Linux Foundation.
How Credit Unions Can Use Blockchain
Credit unions can use blockchain for a variety of critical functions.
Blockchain can facilitate person-to-person payments and also international remittances and payments, the Glenbrook/PSCU white paper notes. However, it also has the potential to enable large-scale transactions between financial institutions.
Blockchains can also record changes in asset ownership. Indeed, the white paper notes, record keeping is a time-consuming and labor-intensive activity "all too familiar to credit unions," and may be among the most compelling applications for blockchain-based databases.
For example, blockchains could make all of the parties to an auto loan — financial institutions, auto manufacturers, leasing companies, state and local governments, and, perhaps, consumers — able to track vehicle and loan ownership more quickly and securely. "A system like this would speed and condense what is currently a multistep process, reduce paperwork and have the potential to lower costs, especially once a majority of stakeholders use the system," the white paper notes.
Blockchain can also be used to more securely identify customers. The white paper says that blockchain could "hold proof of a user's identity through the storage of a digital representation of a driver's license or birth certificate, a passport, a biometric such as a fingerprint, a photograph or other data." Such a task would be a major undertaking and credit unions would still be required to validate the credentials of customers, but it could be a big help. CULedger also wants to tackle identity management.
"Digital identity was chosen because it's of most benefit to our membership," John Best, CEO of Best Innovation Group, who is leading the development of CULedger, tells the publication Tearsheet. "The challenge is this idea of sovereign identity - putting identity in the hands of the customer."
There is a great deal of potential for blockchain, and credit unions should follow how the use cases evolve and mature as they consider whether to deploy the technology in the months and years ahead.