The National Credit Union Administration (NCUA) published a letter that clarifies certain expectations for federally insured credit unions contemplating the use of new or emerging distributed ledger technologies, or DLT, to transform their traditional financial operations and services.
The letter reiterates the importance of sound governance and planning related to deploying new technologies like distributed ledger technologies. The letter clarified that credit unions may appropriately use distributed ledger technologies as an underlying technology and highlights a variety of relevant issues which credit unions should evaluate prior to deployment in terms of compliance with all applicable laws and regulations, including applicable state laws or state supervisory authority requirements. The NCUA expects credit unions to exercise judgment, apply sound risk-management practices, and conduct necessary due diligence when choosing to offer a new platform, product, or service, including where distributed ledger technology is part of the underlying technology. These assessments include evaluating the permissibility of an activity and the opportunities and risks associated with any underlying technology.
To evaluate whether to use distributed ledger technologies, the letter specifies focus areas such as Governance, Oversight and Planning, and Risk and Risk-Mitigation strategies and ensuring that
- the credit union’s board of directors is notified of advancements in the underlying technology, the purposes of the technology, and how using distributed ledger technology aligns with the credit union’s strategic planning objectives and approved risk tolerances.
- the credit union staff and third parties using and managing the technology are complying with applicable laws and regulations and acting in a safe-and-sound manner.
- effective risk-management practices are followed to identify, assess, and mitigate risks associated with distributed ledger technologies, including cybersecurity risk, legal and compliance risk, strategic and reputational risk, liquidity risk and third-party risk.
- risk assessment and audit functions can validate and attest to the effectiveness of risk-mitigation practices in accordance with internal policy and industry leading practices.
Keywords: Americas, US, Banking, Credit Unions, Distributed Ledger Technology, DLT, Compliance Risk, Reputational Risk, Liquidity Risk, Third-Party Risk, Regtech, NCUA
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