NCUA Guidance on Third-Party Digital Asset Providers

As more financial institutions are beginning to embrace cryptocurrency, regulators are carefully monitoring the situation to ensure customers are protected. Late last year, the National Credit Union Administration (NCUA) Chairman, Todd Harper, released a letter that provided assurance for credit unions who want to allow their members to buy, sell and hold digital assets like cryptocurrency. The letter provides clarity on the use of third-party providers by federally insured credit unions (FICUs).

Read on for a high-level review of the guidelines outlined in this letter and some practical ways organizations can apply this guidance.

What to Address in Policies, Procedures and Third-Party Contracts

FICUs are expected to adopt written policies and procedures to ensure that their digital asset provider has established appropriate internal controls and ongoing compliance. Per the NCUA, the FICU should address the following:

• The features of the program. This should describe the types of products, services and technologies that the third-party provider may offer.
• A description of the responsibilities of the FICU and the third party. The third-party provider should be responsible for ensuring digital asset services are performed in compliance with applicable laws.
• Indemnification by the third party. Contracts should include provisions to indemnify the FICU for any monetary damages that may arise from the use of digital asset services.
• The roles of the FICU and the third party. The FICU should describe the roles of its employees when performing administrative functions related to digital asset transactions.
• The location of non-deposit sales. This relates to the method of which non-deposit sales are made and how they’ll be separated from deposit-taking activities.
• The use and disposition of FICU member information. FICU policies should describe the information that be transferred between the third party and the FICU, including how it’ll be used and where it’ll be stored.
• Termination of the contract. Provisions should be included in the contract that allow the FICU to terminate for both cause and convenience.
• Ongoing compliance with the requirements of all applicable law. FICU programs should be maintained to monitor third-party compliance. This should include a system that monitors member complaints and periodically reviews member account activity to search for signs of abuse.

By addressing these core components in policies, procedures and agreements, FICUs will be in a better position to safely facilitate services between their members and third-party digital asset providers.

Initial Due Diligence Best Practices

As with any other third-party vendor, the NCUA also expects that FICUs perform proper due diligence on their digital asset providers before bringing them into their organization.

Here are four due diligence best practices that can help build a strong third-party relationship:

1. Begin early. Performing due diligence is a time-consuming, but necessary, process to ensure that your institution is protected from third-party risk. Start the process well before the anticipated contract signing to avoid any mistakes caused by rushing.
2. Scale due diligence in proportion to the risk. The level of due diligence should represent the amount of inherent risk associated with the vendor.
3. Document your efforts. It isn’t unusual to face some challenges when attempting to obtain specific documentation. Make sure you always document your efforts and, if necessary, engage senior management to approve alternative or missing information.
4. Engage subject matter experts. Once you’ve obtained the required documents, make sure that they’re thoroughly reviewed and analyzed by qualified subject matter experts.

While digital asset services grow in popularity, it’s important to remember that third-party risk management is more important than ever. Performing proper due diligence, contract management and ongoing monitoring are all essential practices that will protect your organization from third-party risk.