The Transition to Web3 and Distributed Ledger Technology

A new technology solution no only holds the potential for all credit unions but promises to level the playing field for smaller credit unions. This disruptive technology affordably transforms a credit union, allowing it to offer decentralized and transparent systems that promise to democratize financial services. Web3 and DLT give members more control and transparency when moving their money from place to place or person to person. This transition increases efficiency, security, and inclusivity, all attributes that align credit unions with their core values.

Understanding Web3 and Distributed Ledger

To understand Web3, consider it the third generation of the internet. Web1 was a dial-up internet that was static and had one-way communication. With Web 2, it became the “social web.” Web2 transitioned from static, one-way communication to dynamic and interactive content, including the onset of social media, user-generated content, and increased collaboration abilities on the Internet.   Web3 is characterized by its decentralization, interoperability, and user-centricity. It empowers individuals by enabling peer-to-peer interactions without intermediaries (what, no Venmos, PayPal, or WesternUnion?). When you add Distributed Ledger Technology, the underlying infrastructure provides a decentralized, tamper-resistant, and secure database technology to record and verify transactions. This disruption allows a more equitable and user-centric digital environment, which, in turn, fosters trust and transparency. Combining Web3 and DLT will revolutionize how credit unions operate by offering a range of benefits.

Benefits for Credit Unions

The value Web3 and DLT provide credit unions is inescapable. It provides:

• Enhanced Security, Transparency, and Trust: Implementing DLT ensures a secure and tamper-resistant record of transactions. Every transaction is recorded on the Ledger, providing an immutable and auditable history. With DLT, members verify transactions themselves. This empowerment enhances the transparency and accountability of all transactions and builds trust between the member and the credit union.
• Reduced Transactional Cost and Operational Efficiency: By leveraging smart contracts on blockchain networks, credit unions can automate processes, and eliminate the need for the many manual interventions they now must use. Through this automation and the elimination of manual intervention, there are significant operational cost savings that enhance overall efficiency and member satisfaction. Using smart contracts the credit union streamlines loan approvals, identity verifications, and payment processing. Distributed Ledger transactions are faster and more efficient compared to traditional banking systems. All of this means that credit unions can streamline processes such as fund transfers, loan approvals, and settlements, reducing processing times, and operational costs. The impact on the expense ratio is noticeable.
• Improved Financial Inclusion: Web3 facilitates financial inclusion by providing services to the unbanked or underbanked populations. Through decentralized finance (DeFi) applications built on Web3, credit unions can expand their reach and offer services to a broader demographic. What a great way to leverage the credit union’s CDFI designation or expand into banking deserts and new markets. These decentralized finance (DeFi) applications, allow members access to financial services without traditional barriers. This fosters financial inclusion of marginalized or unbanked members of the credit union’s field of membership, a way to really become an organization built on “People Helping People.”
• Enables Smart, Automated Contracts: Smart contracts are self-executing contracts with the terms of the agreement directly written into the code and are able to automate various processes within credit unions. This includes loan approvals, dividend distribution, and membership management, reducing the need for intermediaries (often third-party vendors.) This automation not only reduces operational and vendor costs but also minimizes the risk of human error.
• Increased Interoperability and Collaboration: Web3 promotes interoperability between systems and seamless collaboration between credit unions and other financial institutions. Shared protocols and standards facilitate the exchange of data and assets. The end result is an interconnected financial ecosystem.
• Enhanced Member Empowerment: The decentralized governance models of financial transactions enable credit union members to participate in decision-making processes actively. Members can voice their opinions on important matters through voting mechanisms on blockchain networks, promoting a more democratic and inclusive structure for the credit union.

Steps for Transitioning

But there are six steps that a credit union must consider to make this transition successful:

1. Member Communication: Transparent communication with credit union members is essential. Members need to be educated about the benefits of Web3 and DLT and how to use its new services. This is a new technology, and time and attention need to be applied to educate them. The member education must address their concerns and help them understand the empowerment and transparency they will enjoy as they adopt this new technology. By involving members in the transition process, the credit union will foster shared ownership.
2. Staff Education and Training: Clear communication with the staff will help build trust and ensure a positive reception of the change. To successfully transition to Web3 and DLT, credit union staff must be well-versed in the principles and technologies involved so they adapt to the new paradigm. There may be pushback from some staff because they see this replacing some of the manual processing they now do. These real concerns must be addressed. All staff must become experts at how to use the technology so they can become advocates for the new technology but also able helpers as members adapt to the new ways of doing banking.  
3. Integration with Legacy Systems: Transitioning to Web3 and DLT should be a phased approach. Every credit union executive appreciates that there may be challenges integrating with existing legacy systems. To be clear, this transition is not even close to the time, effort, and resources needed to do a core or online bank conversion, but it will still require collaboration with those core systems and a good project plan to minimize disruptions. Working with the legacy core, online banking vendors, and loan origination systems to understand compatibility and interoperability is vital. Some legacy systems may not seamlessly integrate with Web3 and DLT, so in these situations, the transition will require careful planning and a more gradual approach.
4. Regulatory Compliance: The regulatory environment for financial institutions concerning Web3 and DLT is still evolving. Credit unions must navigate compliance challenges and work with regulators to ensure that adopting these technologies aligns with legal requirements. Ensuring compliance with existing regulations and anticipating future changes is crucial for a smooth and secure transition. By working with BankSocial or other FinTechs will ease the regulatory hurdles by leveraging what they have learned from other credit unions during this transition.  
5. Collaboration with Tech Partners: Beyond the regulatory hurdles, engaging with BankSocial or other technology partners will allow the credit union to build customized solutions that address the specific needs and goals of the credit union. Collaborative efforts ensure the transition is tailored to the institution’s unique requirements.
6. Consider Pilot Programs: The beauty of Web3 and DLT is they can be implemented using a phased approach; the credit union doesn’t have to eat the “whole elephant.” They can “take one bite at a time” by starting with small-scale pilot programs to test the feasibility of implementing DLT in defined areas of credit union operations. This approach allows the credit union to mitigate risk, identify challenges, and refine its strategies before broader implementation.

My crystal ball is always a little foggy, but through my research, there is little doubt this new technology will disrupt many of the payment systems and processing steps and applications being used by credit unions. And this disruption is not in the far-distant future. Web3 and DLT are transformative technologies. While implementation challenges exist, the benefits of enhanced security, transparency, operational efficiency, access to the underbanked or unbanked market, and member empowerment will prove to be significant. By embracing these technologies, credit unions will position themselves at the forefront of innovation, delivering improved services and experiences that their members will value. Credit unions that approach this transition with a strategic mindset, stay informed about developments in the regulatory landscape, and foster a culture of continuous innovation, learning, and adaptation will not just survive but will thrive.