Credit Union Exam Solutions Presents With Flying Colors

Treichel: Okay everyone.

This is Mark Kel with another
episode of With Flying Colors.

Today I'm gonna be chatting about NCAA's
stable coin proposal and what credit

unions need to know in that regard.

Now the NCUA has issued a proposed rule
to implement the Genius Act, which was

signed into law on July 18th, 2025.

That act requires that NCUA and
other regulators establish a

licensing framework for credit union
subsidiaries that want to issue payment.

Stable coins.

Here's one of the big takeaways.

Credit unions cannot issue
stable coins directly.

They must do so through
a licensed subsidiary.

And when you hear subsidiary,
what do you think of?

Of course, credit union
service organizations or QSOs.

So that's likely where this will land.

If it makes sense for you and
your credit unions your credit

union members and the industry.

So this proposal sets the groundwork
for how that would work, and it raises

some important strategic and regulatory
questions that I'm gonna break down here.

As a refresher, what is the Genius Act?

The Genius Act?

Creates a federal regulatory
structure for payment.

Stable coins under the act only permitted
payment, stablecoin, issuers, or pps.

I, we'll see if that acronym takes off.

Can issue payment Stable
coins in the United States.

Insured depository institutions,
including credit unions,

cannot issue these directly.

They must operate through subsidiaries.

Those subsidiaries are supervised by
their primary federal regulator, and of

course that would be NCUA in federally
insured credit unions instances.

The act also requires one-to-one
reserve backing using US currency

or other approved liquid assets,
public redemption policies.

Monthly reserve disclosures, A ML
and BSA and sanctions compliance.

IT and risk management standards
and critically stable coins

are not federally insured.

They are not backed by the full faith
and credit of the United States,

and they cannot be marketed as such.

Now, NCA must also implement.

Issue implementing regulations
by July 18th, 2026.

It'll be interesting to
see when that comes out.

It'll be interesting to see if when
that comes out, Kyle Halman still

on the board or we have a new board
chair or who knows, Halman and Osco

win, win or lose their lawsuit.

There could be different board members
proposing that required rule so to speak.

Now, this proposal is only phase one
licensing and investment structure.

A sub sec, a second proposal
will cover operational standards.

So we've got this proposal, we
have another proposal, which

will be operational standards.

And then they would have the implementing
regulations that will follow.

So the office of General counsel
which has lost a big chunk of their

staff because of the reorganization,
is gonna be quite busy on.

Proposing these regulations, which may
or may not have any bandwidth in the

credit union industry, time will tell.

So how is this similar to
the banking regulators?

Is in, is the NCOA proposal
materially different from the

banking regulators are doing?

The short answer is no, not really.

Structurally, they're almost
identical, and that's because they're

all implementing the same law.

The Genius Act, the statute directs
the NCOA, the FDIC, the OCC, and

the Federal Reserve to build a
licensing framework for PP sis.

Now across regulators, you
see the same architecture.

Stable coins must be issued
through a subsidiary, A licensed

subsidiary applications are reviewed
under the same statutory factors.

Regulators have 120 days to act once an
application is substantially complete.

Now that's interesting in
that it puts the onus on the

regulators that if you're late.

You're going to get,
you're gonna get approved.

So if they missed 120 K, 120 day, but what
that also means is substantially complete.

You'll, what you'll see in field
membership cases historically

or other actions is they'll say,
your application is incomplete.

You need to address A, B, C.

And that restarts the clock.

So watch for that 1, 2,
3 years down the road.

Once this thing is actually
up and running, issuers must

maintain one-to-one reserves.

There are strict governance
capital liquidity al a ML,

and technology expectations.

And as I said previously, stable coins
cannot be marketed as federally insured.

Where they differ is not in substance,
but in institutional structure,

banking regulators generally
assume a single parent bank model.

An N two A proposal anticipates
widely held joint owned cooperative

subsidiaries, IE QSOs, that reflects the
credit union model, so sub substantively

similar, structurally tailored.

A quick note on the Clarity Act and
the rewards versus interest question.

There's another bill floating
around the Proposed Clarity Act,

and some have asked whether that
changes the stable coin landscape.

So here's my take.

It does not replace the Genius Act.

The Genius Act governs how
stable coins are issued, and

supervised clarity is broader.

It addresses how digital assets
are classified and whether they

fall under the SEC or S or the cf.

TC jurisdiction.

Now here's the subtle issue.

Genius is designed to keep payment
stable coins from looking like interest

bearing deposits or securities.

If an issuer pays something that
walks and talks like yield, even

if it's labeled rewards, regulators
will look carefully at whether it's

economically the same as paying interest.

That becomes a safety and
soundness issue under genius and

potentially a classification issue.

Under clarity, if the product starts
to resemble an investment contract for

credit unions, especially this matters,
stable coins are not insured shares.

They cannot blur that line.

So while clarity affects the broader
digital asset market structure,

the interest versus reward debate
will likely play out inside the

genius supervisory framework.

And as an aside, there's a lot of.

Podcast, the FinTech Takes podcast,
talks a lot about this rewards versus

interest and, in the FinTech takes
discussions, it seems pretty clear that

this was a loophole, that the people
got into the law, that were supportive

of crypto, that were supportive of
stablecoin, and that quite frankly,

I think the banks and credit union
lobbyists missed because there is a

workaround that allows it to be rewards.

It just can't come directly
from the stable coin.

And I think the Clarity Act has come along
saying, oops, we should have done better.

On this, and it's creating as structured,
potentially more competition for

banks than banks thought it would.

When they saw that originally
they were not allowed to pay

interest, but this reward loophole.

Seems to be potentially problematic in
that regard, so it'll be interesting

to see where that plays out.

If credit unions want to participate
in issuing stable coins, it must, as

I said, must do through a subsidiary.

So that would be a qso and that subsidiary
must obtain an nnc A-P-P-S-I license.

So here's the nuance.

Instead of requiring every investing
credit union to apply individually, the

subsidiary applies jointly with only
what the roll calls parent companies

who qualifies as a parent company, any
credit union that owns 10% or more on

voting securities or has the ability
to direct management or policies.

If no credit union owned tens percent,
the largest SH shareholder becomes the

parent company NCOA selected the 10%.

Because it's a common material
control threshold in banking laws.

This avoids forcing dozens of
investing credit unions to file

duplicate duplicative applications,
especially giving the 120

day statutory decision clock.

The framework clearly anticipates,
pooled cooperative models like QSOs.

Now, then there's the investment
limitation in QSO implications.

As a reminder for federal credit
unions, the constraint is the 1% cap.

Federal credit unions may invest up
to 1% of total paid in unimpaired

capital and surplus into organizations
such as QSOs, PPSI investments

aggregate into the same 1% bucket.

So if your institution is already
near its Q cell limits partition.

Participations may be a bit constrained.

The NCA is also proposing that psis
formed by federal credit unions operate

through of course, the part 7 1 2
QSO framework that raises legitimate

question, should p psis be treated
differently from traditional QSOs?

Should certain part 7 1 2 requirements
be streamlined or made tougher?

Should PP sis be required
to register in the queue?

So registry.

The board, the NSU Board of one is openly
requesting comments on these issues.

Now in regards to licensing, re
requirements and evaluation factors,

applications is proposed, will be
evaluated under statutory factors

including financial condition
and re reserve sufficiency,

absence of disqualifying felony
convictions, competence, experience,

and integrity of management,
adequacy of redemption policies.

Overall safe, safety and soundness
as proposed applicants must

submit detailed business plans,
pro forma financial statements.

Capital and liquidity plans, technology
and risk management documentation,

biographical and financial reports.

Fingerprints for certain
officers and directors.

Once an application is deemed
substantially complete, and

Sue has 120 days to decide.

As I mentioned before, if the agency
fails to act within that timeframe,

the application is deemed approved.

That's not a situation any regional
director ever wants to find

themself in where they approve
something by not responding.

So this statutory clock is
important and it does matter.

So the cost question and Sue is also
including, considering how to fund these

expanded, this expanded supervisory role.

Options include licensing fees,
examination fees, or spreading

the cost across all credit unions
through the general budget.

My guess is a lot of credit unions
won't like that last option unless of

course they wanna be in stable coins.

They'd rather have it
spread out if you in it.

If you're not in it, you probably
wanna have the individuals.

That are in it to pay for it.

Because Stablecoin participation is
optional and likely limiting to limited

to a minority of institutions, the board
is obviously seeking whether costs should

be born only by those participants.

That discussion could become a
significant part of the debate.

In closing on this topic,
what does this mean?

First, this rule does not push
credit unions into stable coins.

It creates a potential pathway.

Second, the framework is
cooperatively friendly.

Third, capital constraints and structure.

Structural limits matter.

Fourth, operational standards are
still coming, so stay tuned for that.

I guess it would be pretty soon.

This is one of the most significant
expansions of NNC a's supervisory

authority In recent memory.

Some would pose, it places the agency
firmly into digital asset regulation

but in a cautious safety focused way.

Comments are due 60 days after
federal registered publication.

So roughly in 60 days from now, if
your credit union is even considering

this space, now is the time to engage.

If the proposal makes sense, NSU
A does listen to comments, so I

encourage you to take a look at that.

Now, pivoting away from that proposal
NCUA also recently announced.

Stage five of their round
of deregulation proposals.

The short version on this is
that this is mostly changes from

happy to glad or glad to happy.

What does that mean?

It means these are mundane tweaks to
regulations and the items that we're in.

Version five of this is relates to
three proposals conversion of insured

credit unions to mutual savings banks.

The board proposes to reduce regulatory
burden and increase flexibility by

eliminating some procedural disclosure
and communication requirements

for converting insured credit
unions to mutual savings banks.

That happens very rarely.

I can't remember the
last time that happened.

It was big about 15 years ago.

But they're making it less onerous.

Should a credit union wanna take this
direction, impact on credit unions?

Among other things, the proposed
changes would simplify regulatory

compliance for conversion disclosures
and allow credit unions the flexibility

to design disclosures that are
effective and clear for their members.

The next proposal that
ha has a tweak to it.

Is the mergers of insured
credit unions into other credit

unions, voluntary termination
or conversion of insured status.

The board proposes to
retain the core disclosure.

And notification requirements, whether
credit union's members vote on a decision

to merge or terminate federal insurance
coverage and convert to private insurance,

but eliminate prescriptive requirements
associated with those disclosures.

What's the impact on credit unions?

This proposed change would relax.

Dictate to provide modest
merger related cost savings

and reduce unnecessary burden.

It would provide credit unions with
greater flexibility in designing

effective communications while still
ensuring that members receive clear

and prominent notice of a proposed
termination of federal insurance.

Why any credit union would
wanna go to private insurance.

I have no idea.

And so it's rare this is even.

Even rare than the Mutual Savings
Bank one discussed earlier.

So again, this is this is a deregulatory
change that really impacts virtually

nobody, or as Van Morrison once said,
what's the sound of one hand clapping?

Lastly, the organization and
operation of Federal Credit Unions.

The board proposes to rescind herbs
oh six dash one because the current

field of membership, FOM requirements
are in the chartering manual.

So what's the impact?

This change would eliminate a
redundant standard currently

listed in more than one area.

This would ease.

The compliance burden on federal credit
unions by limiting the number of sources

they must check to ensure compliance
with applicable community chartering

and field membership requirements.

So again, not much there.

The big takeaway is what we talked
about for most of this podcast,

which is the stable coin proposal,
which was required to be put out.

NCA is going in the direction
that they're required by the

law, by the Trump administration.

And it will be interesting to see.

Where this where this heads, it'll
be more interesting to see if stable

coins actually do ever take off and
do impact banks and credit unions.

A lot of noise around this,
a lot of theories around it.

And you gotta play to win sometimes.

I'm not sure if this is something
that will ultimately be important

for credit unions or not.

What's your take on it?

Send me a note.

If you believe stable coins are
the future or are not the future.

All right.

This is mark Rele.

We've got some more
exciting episodes coming up.

I wanna thank you for listening.

Thank you for watching.

As always, mark TriCal signing
off with flying colors.