Credit Unions Seek to Become First to Market With Banking Blockchain

More than 50 credit unions are now laying the groundwork for what they believe could become the financial industry's first live blockchain project.

AccessTimeIconSep 3, 2016 at 11:28 a.m. UTC
Updated Dec 12, 2022 at 12:55 p.m. UTC
credit union, bank
credit union, bank

The credit union industry is following the lead of hackers and thieves, according to Jeff Johnson, chief information officer at Illinois-based Baxter Credit Union (BCU).

"This is going to sound strange," he said. "[But] criminals, no matter how much you hate them, are really smart people. They take the path of least resistance."

In his mind, if it’s working for international payments on the black market, there has to be a way to leverage the technology for above-board use that is just as robust, anonymous and secure.

It's one of the reasons BCU has joined 55 other credit unions and four of the largest credit union service organizations (CUSOs) on the CU Ledger blockchain project, led by the Credit Union National Association (CUNA) and Mountain West Credit Union Association (MWCUA).

The ongoing effort, those involved say, is similar to work being conducted at major consortium projects launched by big banks. For example, R3CEV has attracted more than 40 traditional financial institutions for trials that have focused on applying the tech to commercial paper and trade finance.

But while R3 has garnered more attention, CU Ledger believes it has a better chance of pushing technology through to commercial production first, due to the cooperative nature of credit unions.

"The two basic [blockchain] concepts are scale and security, and we've together credit unions representing enough members so that when we get this going we should be able to scale quickly," said Rich Meade, chief of staff and chief operating officer at CUNA.

He added:

"Plus, to have the four CUSOs collaborate on something hasn’t happened for a long time. This could be big, getting all those people at the table."

The credit union advantage

To Meade, this is setting up a David and Goliath-type dynamic, one where the smaller, nimbler and smarter participant might prove more adept at succeeding at its goals more quickly.

"We focus on individual people, while they focus on commercial entities," Meade said, adding:

"Credit unions have more to gain than to lose when looking at this opportunity. The competition among us isn’t big enough to push out [our] cooperative side."

That competition in the traditional banking sector is fierce is one of the reasons many analysts have turned skeptical of the private financial blockchain projects. Since banks see their customer information as a competitive advantage, the incentives aren't there for banks to collaborate on blockchain, especially with high-dollar corporate customers.

Further, the collaboration necessary for distributed ledger systems to work is something credit unions have succeeded at before.

For instance, the industry created the CUNA Mutual Group, which provides commercial and consumer insurance and protection products, and CO-OP Shared Branching, a national network of credit unions that share facilities so members have convenient locations to perform financial transactions.

The credit union industry also came together to form a technology standards body, CUFX, which developed standards for integrating software technology into existing credit union systems. CUFX went so far as to define the data fields (What is a member? What are the different loan types? Etc.) and specified how information is transmitted within credit union systems.

Software providers now have a standardized template for building for credit unions, making it faster and easier for them to plug into third-party software systems.

Furthermore, Meade is one of the better-suited candidates to steer CU Ledger, since he's built collaborative systems in the past. Before CUNA, as a consultant for the National Renal Administrators Association, he created a health information exchange that the US government eventually partnered with.

"Financial services has many similarities to healthcare, for instance you're dealing with encrypted, very sensitive information," said Meade.

The use cases

Unlike many of the enterprise blockchain projects, CU Ledger's work will be consumer-facing.

After a meeting in Chicago last week, CU Ledger has started working with sovereign identity provider Evernym Inc to build an identity-related proof of concept on top of a permissioned blockchain.

"Specifically in the credit union industry, one thing comes to mind is the whole digital identity, having a trusted identity owned by a member," BCU's Johnson said. "It's important because we're being faced with increasing fraud and identity theft."

Identity as it relates to ownership and privacy is a particularly hot topic today, and even more so in the credit union industry, which is focused on delivering better products and services to each individual member, Johnson said

Sovereign identity is the first track of the CU Ledger project, while the second will focus on scouring the blockchain industry to find the third-party provider that would be best to work with for the project in the long-term.

The plan is to have those two tracks meet in the middle by May of next year, with the proof-of-concept proven out and the top potential blockchain providers identified, Johnson said.

"When we pick a blockchain technology, we have to feel comfortable that it's going to be around decades from now,” he said. "If you think about the underlying guts of the technology, it has to be like the World Wide Web has been, because the storage of all the transactions needs to go on forever."

Another reason for shopping around for providers is that the group is still unclear exactly which use case will pan out. Johnson also thinks blockchain could be used by credit unions to more efficiently communicate and transact within the CO-OP Shared Branching network.

Meade added that another application credit unions are interested in is whether blockchain could create a more efficient management of indirect auto lending.

"Until you build the network, you don't know all the applications that could run on it,” said Meade. "There’s been a lot of hype around blockchain, but I think this is a lot more than just hype."

The CU Ledger group has had initial conversations with R3, but Meade said he wants the credit union industry to have its own platform.

"It’s important for credit unions to build this out and not have something dictated to them by other people with their own pricing,” he said, concluding:

"We want to create this as a utility for credit unions."


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