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What about Blockchain and Credit Unions?
Monday, May 15, 2017 6:40 AM

Bob Rehm, CUDE, VP Sales and Service, Credit Union Resources

About a year and a half ago, Credit Union Resources launched what we call our Impact Group. The Impact Group is a representative group of Resources members that meets periodically to learn more about our services, explore trends, and offer feedback on potential new products. In some cases, we collaborate with one or more of our partners to discuss relevant topics such as branch transformation, data analytics, etc. These meetings also serve as a way to validate that our product direction is in sync with our members’ business plans.

The Impact Group met April 11, during the Cornerstone Annual Meeting, for a discussion on blockchain technology. Dean Borland facilitated the discussion with subject matter experts Terrence Griffin of CO-OP Financial Services and Bill Hampel of CUNA. Bill and Terrence gave the group a global overview of the technology, the latest research, and how blockchain might be used in the credit union space.

Highlights from Impact Group discussion of Blockchain:

  • Blockchain is the backbone upon which Bitcoin runs, but Blockchain is NOT Bitcoin.
    • Blockchain (or distributed ledger/shared ledger, as it is sometimes called) is a digital information management network that facilitates a consensus of replicated, shared, and synchronized data.
    • Data authentication is achieved through a consensus of information contained in a network of replicated databases called “nodes,” which process the blocks of data and align them in “chains” (where the term “blockchain” comes from). Every node contains a full record of the entire blockchain.
    • Strength in numbers, authentication, and subsequent use of any data component within the blockchain requires consensus of the majority of the nodes. Compromising the blockchain requires taking control of more than half of all the nodes and breaking the encryption code.
       
  • Blockchains generally comes in two varieties—an open/non-permissioned system or permissioned/closed system.
    • The blockchain backbone of Bitcoin is an example of an open system. It exists in the public domain. Data is highly encrypted within nodes to preserve its security and integrity, but the data is transferred openly across the internet. Anyone who can fulfill the Bitcoin processing requirements can become a node.
    • Nodes on permissioned blockchains must be vetted as trusted partners, not only assuring they meet the computing requirements but also validating their integrity. Like open networks, data is highly encrypted, but it is not transferred through the public internet, adding yet another layer of security.
       
  • Blockchain/distributed ledger/shared ledger remains an evolving technology being studied across several industries, including credit unions.
    • CU Ledger, a project jointly managed by CUNA, Best Innovation Group (John Best), and Mountain West Credit Union Association, is enlisting credit unions to participate in a prototype permissioned distributed ledger to test feasibility and use cases.
    • CO-OP, in collaboration with TMG, commissioned a study in 2016 conducted by Mercator Advisory Services to analyze blockchain’s potential.
    • While their approaches differ, CO-OP and CU Ledger agree that blockchain applications could provide potentially valuable uses, including but not limited to enhanced security associated with identity verification and remote execution of contracts.
       
  • Barriers to leveraging blockchain technology:
    • High-volume, low-value transactions are not necessarily a practical use for this technology, which likely makes it impractical for use in processing consumer payments.
    • Speed of transaction processing is an issue with blockchain. In a fully loaded system, a typical transaction could take minutes to complete.
    • Depending on the volume of data and use of the system, blockchain processing could require extensive computing power. The cost of the processing requirements could eliminate otherwise willing participants (nodes).
       
  • Best potential credit union use cases for blockchain (based on current considerations):
    • Executing electronic contracts, i.e., loan participations, processing car titles, or other low volume, high value transactions.
    • Personal identity validation (“sovereign identity”).
       
  • CU Ledger continues to explore possible uses of permissioned ledger the credit union space. Credit unions that are interested in participating in the research can contact:

Rick Cranston, Director of Business & Product Development
Mountain West Credit Union Association
(800) 477-1697 / (720) 479-3342
rcranston@mwcua.com

For additional information, these subject-matter experts recommend Deloitte as a good source for the latest conversation about blockchain.

Next Topic: Lending
The Impact Group’s next topic of study will be lending. Lending is the foundational service of credit unions. Starting with the state of consumer lending today, we will look at how changes to other consumer products and services are delivered may change how loans are delivered. How do technology, member effort, and physical location play into the making of a loan? 

The group’s next meeting will be during the Cornerstone Leadership Conference in September.