[Federal Register Volume 86, Number 141 (Tuesday, July 27, 2021)]
[Notices]
[Pages 40213-40216]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-15948]


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NATIONAL CREDIT UNION ADMINISTRATION

[NCUA 2021-0102]


Request for Information and Comment on Digital Assets and Related 
Technologies

AGENCY: National Credit Union Administration (NCUA).

ACTION: Notice; request for information and comment.

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SUMMARY: The NCUA Board (Board) is gathering information and soliciting 
comments from interested parties

[[Page 40214]]

regarding the current and potential impact of activities connected to 
digital assets and related technologies on federally insured credit 
unions (FICUs), related entities, and the NCUA. The NCUA is broadly 
interested in receiving input on commenters' views in this area, 
including current and potential uses in the credit union system, and 
the risks associated with them.

DATES: Comments must be received on or before September 27, 2021 to 
ensure consideration.

ADDRESSES: You may submit comments by any one of the following methods 
(Please send comments by one method only):
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments for NCUA Docket 2021-
0102.
    <bullet> Fax: (703) 518-6319. Include ``[Your name] Comments on 
``Request for Information and Comment on Digital Assets and Related 
Technologies.''
    <bullet> Mail: Address to Melane Conyers-Ausbrooks, Secretary of 
the Board, National Credit Union Administration, 1775 Duke Street, 
Alexandria, Virginia 22314-3428.
    <bullet> Hand Delivery/Courier: Same as mailing address.
    Public Inspection: You may view all public comments on the Federal 
eRulemaking Portal at http://www.regulations.gov as submitted, except 
for those we cannot post for technical reasons. NCUA will not edit or 
remove any identifying or contact information from the public comments 
submitted. Due to social distancing measures in effect, the usual 
opportunity to inspect paper copies of comments in the NCUA's law 
library is not currently available. After social distancing measures 
are relaxed, visitors may make an appointment to review paper copies by 
calling (703) 518-6540 or emailing <a href="/cdn-cgi/l/email-protection#f8b7bfbbb5999194b8969b8d99d69f978e"><span class="__cf_email__" data-cfemail="0d424a4e406c64614d636e786c236a627b">[email protected]</span></a>.

FOR FURTHER INFORMATION CONTACT: Policy and Analysis: Scott Borger, 
Senior Financial Modeler and Todd Sims, National Payment Systems 
Officer, Office of National Examinations and Supervision, (703) 518-
6640; Legal: Thomas Zells, Senior Staff Attorney, Office of General 
Counsel, (703) 518-6540; or by mail at National Credit Union 
Administration, 1775 Duke Street, Alexandria, VA 22314.

SUPPLEMENTARY INFORMATION: 

I. Background

NCUA Overview

    The NCUA is an independent federal agency that insures shares at 
FICUs, protects the members who own credit unions, and charters and 
regulates federal credit unions (FCUs). The NCUA is charged with 
protecting the safety and soundness of credit unions and, in turn, the 
National Credit Union Share Insurance Fund (NCUSIF) through regulation 
and supervision. The NCUA's mission is to ``provide, through regulation 
and supervision, a safe and sound credit union system, which promotes 
confidence in the national system of cooperative credit.'' \1\ The NCUA 
also works to protect credit union members and consumers. Consistent 
with these aims, the NCUA has statutory responsibility for a wide 
variety of regulations that protect the credit union system, members, 
and the NCUSIF.
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    \1\ https://www.ncua.gov/about-ncua/mission-values.
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Decentralized Finance, Digital Assets, and Related Technologies

    Decentralized Finance (DeFi) is the broad category of applications 
adopting peer-to-peer networks, Distributed Ledger Technology (DLT), 
and related uses, such as smart contracts, to create digital assets 
like cryptocurrency and crypto-assets, clearing and settlement systems, 
identity management systems, and record retention systems.\2\ As noted, 
DLT is the digital process to record transactions that are behind many 
of these innovations. DLT consists of a shared electronic database 
where copies of the same information are stored on a distributed 
network of computers. This shared immutable digital ledger both ensures 
the data cannot be altered and serves to add new information to the 
database. Information is only added to the distributed ledger when 
consensus is reached that the information is valid. As a result, any 
attempt to modify the information on one computer will not impact the 
information on other computers. ``Blockchains'' are one type of 
distributed ledger. In a blockchain, a chronological record of all 
transactions is created and stored on the ledger by sequentially 
grouping all transactions together in blocks.
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    \2\ There are a number of terms used to describe DLT-based 
tokens, including virtual currencies, cryptocurrencies, crypto-
assets, utility tokens, and digital assets. There are a variety of 
reasons these terms have evolved including the fact that these 
digital tokens fail to exhibit the qualities of a currency, and 
therefore, should not be confused by a term like cryptocurrencies. 
The term DeFi recognizes that because DLT has been used to develop a 
broader set of financial products beyond value transfer mechanisms, 
DeFi encompasses a broader range of different digital and financial 
products including settlement systems, security-like and equity-like 
financial instruments, non-fungible tokens, and discount tokens.
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    Digital assets can be transferred between two people without an 
intermediary. However, as a practical matter, most members of the 
public do not have a means of converting dollars into digital assets on 
their own. Software developers and entrepreneurs have created exchanges 
to facilitate the exchange of dollars for digital assets and digital 
wallets to provide customers a convenient way to store their encryption 
keys required to verify ownership of their digital assets. These 
entities serve as intermediaries in the new digital ledger payment 
systems.
    Since the introduction of DLT, thousands of projects have used the 
technology to lower the cost of verifying ownership, storing 
distributed data, or tracking information. The projects have covered 
everything from tracking ownership in national land registries to 
tracking the history of a product in the food supply chain. While DeFi 
offers a number of potential benefits and opportunities for the credit 
union system, it also presents several risks, for example: (1) The 
permanent nature of the transactions necessitates questions about 
consumer recourse for fraudulent financial activities; (2) the ability 
to source funds for new projects has the downside of individuals or 
groups manipulating the price of tokens; (3) the storage of digital 
assets poses risks of lost or stolen cryptographic keys; and (4) the 
ability to transfer value through peer-to-peer networks creates 
unregulated money transmitters that could provide liquidity to those 
who want to launder money or participate in tax-avoidance schemes.
    The NCUA is publishing this request for information with the aim of 
engaging the broad credit union industry and other stakeholders and 
learning how emerging DLT and DeFi applications are viewed and used. 
The NCUA hopes to learn how the credit union community is using these 
emerging technologies and gain additional feedback as to the role the 
NCUA can play in safeguarding the financial system and consumers in the 
context of these emerging technologies. The accelerating pace of change 
information technology brings, coupled with the widespread diffusion of 
computing power and the growing importance of networks, is raising new 
opportunities and challenges. In order to continue to fulfill its 
mandate to maintain a safe and sound credit union system and protect 
credit union members, the NCUA is working to better understand the 
implications of these changes and the associated benefits or challenges 
that may exist.

II. Request for Comment

    The Board seeks comments on the current and potential impact of

[[Page 40215]]

activities related to DLT and DeFi on the credit union system. The NCUA 
is broadly interested in receiving input on parties' views in this 
area, including current and potential uses. Commenters are also 
encouraged to discuss any and all relevant issues they believe the 
Board should consider with respect to these technologies and related 
matters. The Board reiterates that this request for information does 
not modify any existing requirements applicable to FICUs and does not 
grant FICUs any new authorities or limit any existing authorities. The 
request for information does not speak to the permissibility or 
impermissibility of any specific activity.

Questions Regarding Usage and the Marketplace

    1. How are those in the credit union system currently using or 
planning to use DLT and DeFi applications?
    2. What, if any, DLT or DeFi applications are those in the credit 
union system currently engaging in or considering? Please explain, 
including the nature and scope of the activity. More specifically:
    a. What, if any, types of specific products or services related to 
these technologies are those in the credit union system currently 
offering or considering offering to members? Are credit union members 
asking for specific products or services related to these technologies?
    b. To what extent are those in the credit union system engaging in 
or considering DeFi applications or providing services related to 
digital assets that have direct balance sheet impacts?
    c. To what extent are those in the credit union system engaging in 
or considering DLT for other purposes, such as to facilitate internal 
operations?
    d. To what extent, if any, are those in the credit union system 
aware of cross-jurisdiction or cross-border transactions related to DLT 
and digital assets.
    3. In terms of the marketplace, where do those in the credit union 
system see the greatest demand for DeFi application services, and who 
are the largest drivers for such services?
    4. Are there new developments that might affect use of DeFi 
applications by those in the credit union system in the future?
    5. Are DeFi applications a competitive threat for those in the 
credit union system?
    6. What concerns, if any, do those in the credit union system have 
related to current statutory or regulatory limitations on their ability 
to utilize DeFi applications? Are there any changes that would 
influence the credit union system's ability to utilize DeFi 
applications?
    7. Apart from anything listed in this Request for Information, what 
other actions should the NCUA take? Please be as precise as possible, 
including, but not limited to, necessary regulatory changes, additional 
guidance, and legal opinions.

Operational Questions

    8. What are the advantages and disadvantages of FICUs developing 
DLT and DeFi projects through third-party relationships versus through 
a credit union service organization (CUSO)?
    9. How dependent will FICUs be on third-party software and open-
source libraries for their own DLT projects?

Questions Regarding Risk and Compliance Management

    10. To what extent are existing risk and compliance management 
frameworks designed to identify, measure, monitor, and control risks 
associated with various DLT and DeFi applications? Do some DLT and DeFi 
applications more easily align with existing risk and compliance 
management frameworks compared to others? Do, or would, some DLT and 
DeFi applications result in FICUs developing entirely new or materially 
different risk and compliance management frameworks?
    11. What unique or specific risks are challenging to measure, 
monitor, and control for various DLT and DeFi applications? What unique 
controls or processes are or could be implemented to address such 
risks?
    12. What unique benefits or risks to operations do FICUs consider 
as they analyze various DLT and DeFi applications?
    13. How are FICUs integrating, or how would FICUs integrate, 
operations related to DLT and DeFi applications with legacy FICU 
systems?
    14. Please identify any potential benefits, and any unique risks, 
of particular DLT and DeFi applications to FICUs and their members.
    15. What impact will DLT and DeFi applications have on FICUs' 
earnings? How will FICUs ensure they account for any negative impact, 
such as potential lost interchange income as peer-to-peer transactions 
grow?
    16. How are those in the credit union system integrating these new 
technologies into their existing Information Technology environment 
securely, including existing cybersecurity functions and data privacy/
data protection policies? How are the risks in this area being 
evaluated?
    17. What considerations have commenters given to how to maintain 
continued compliance with State and Federal laws and regulations that 
may be applicable to various DLT and DeFi applications, including, but 
not limited to, those governing securities, Bank Secrecy Act (BSA) and 
anti-money laundering, and consumer protection? Have those obligations, 
or uncertainty related to potential obligations, impacted commenters 
DLT and DeFi activities? How do commenters' DLT and DeFi activities 
address requirements in these areas?
    18. How specifically do DLT and DeFi projects in the credit union 
system address BSA and Know Your Customer (KYC) requirements?
    19. How can FICUs address fraud and other consumer protections with 
an immutable digital ledger? How can FICUs ensure continued compliance 
with any applicable consumer protection requirements that may arise 
with various DLT and DeFi applications, such as obligations related to 
fair lending, electronic funds transfers, and funds availability?
    20. If utilizing, or planning to utilize, any of these or related 
technologies, what steps have been taken in providing the services and 
what has been done to ensure the services are being utilized safely and 
in compliance with all applicable laws and regulations? Please 
describe:
    a. The process for developing a sound business case and presenting 
it to the board of directors for approval;
    b. The process for ensuring the consideration of all of the risks 
and risk categories;
    c. The level of due diligence performed on any vendors or third 
parties and whether the vendors were a new entry in the market or an 
established technology provider;
    d. The process for assessing the quality and level of internal 
information systems and technology staff to support systems and 
applications; and
    e. The process for developing internal oversight of the program.

Questions Regarding Supervision and Activities

    21. Are there any unique aspects the NCUA should consider from a 
supervisory perspective?
    22. Are there any areas in which the NCUA should clarify or expand 
existing supervisory guidance to address these activities?
    23. The NCUA's Part 721 application procedures may be applicable to 
certain DLT activities.\3\ Is additional clarity

[[Page 40216]]

needed? Would any changes to NCUA's regulations be helpful in 
addressing uncertainty surrounding the permissibility of particular 
types of DLT activity, in order to support FICUs considering or 
engaging in such activities?
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    \3\ 12 CFR part 721.
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Questions Regarding Share Insurance and Resolution

    24. Are there any steps the NCUA should consider to ensure FICU 
members can distinguish between uninsured digital asset products and 
insured shares?
    25. Are there distinctions or similarities between stablecoins 
(cryptocurrencies that are backed by a currency like the U.S. Dollar 
and are designed to have a stable value compared to other 
cryptocurrencies) and stored value products where the underlying funds 
are held at FICUs and, for which pass-through share insurance may be 
available to members in limited scenarios?
    26. If the NCUA were to encounter any of the digital assets use 
cases in the resolution process or in a conservatorship capacity, what 
complexities might be encountered in valuing, marketing, transferring, 
operating, or resolving the DeFi activity? What actions should be 
considered to overcome the complexities?

Additional Considerations

    Commenters are invited to address any other DLT and DeFi 
applications or related information they seek to bring to the NCUA's 
attention. Commenters are encouraged to provide the specific basis for 
their comments and, to the extent feasible, documentation to support 
any comments.
    Authority: 12 U.S.C. 1756 and 1784.

    By the National Credit Union Administration Board on July 22, 
2021.
Melane Conyers-Ausbrooks,
Secretary of the Board.
[FR Doc. 2021-15948 Filed 7-26-21; 8:45 am]
BILLING CODE 7535-01-P


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