By: David L. Beam
The Consumer Financial Protection Bureau just released an advisory for consumers on digital currencies (a.k.a. “virtual currencies”) like Bitcoin. But the thing that’s most extraordinary about the advisory on digital currency is what it doesn’t say.
Followers of CFPB releases are accustomed to promises to root out and crush the ne’er-do-wells who would hurt consumers in financial transactions. However, there’s none of this in the digital currency advisory or Director Cordray’s accompanying statement. The statement describes the digital currency marketplace as the “Wild West.” But the Director doesn’t finish the metaphor with a promise to hang anyone high. The end of the advisory just invites consumers to submit complaints. A blog post said that the agency would “work to get a response” for the consumer.
This despite the fact that the Government Accountability Office issued a report in June that criticized the CFPB for being reticent to get involved with interagency working groups on virtual currency and to ensure that consumer protection issues with respect to virtual currency are addressed.
Reticence is not normally a word one associates with the CFPB. So what’s going on with the CFPB and digital currencies? We’ll offer a hypothesis below. First, a summary of the advisory.
Summary of the Advisory
Digital currencies, especially Bitcoin, have received enormous media attention over the past year. As a result, many consumers are dipping their toes into the digital currency marketplace. Many of these consumers might not fully understand how digital currencies work or what the risks are. The advisory contains a lot of good advice for these consumers. For example, the advisory warns consumers to:
• Keep their private keys safe;
• Investigate any company offering digital currency products or services before doing business with them, such as by checking whether they are registered with FinCEN or hold state money transmitter licenses;
• Be prepared for significant fluctuations in digital currency value;
• Be aware that digital currency transactions are not always private; and
• Watch out for scammers, who are trying to take advantage of people entering the digital currency marketplace without fully understanding the market.
The advisory also explains to consumers that there is little regulation of digital currencies, no government insurance, and no way to reverse transactions (even in the event of fraud or a mistake).
At the end of the advisory, the CFPB invited consumers to submit complaints regarding virtual currency companies with which they have had problems.
The advisory shows that the CFPB is thinking about virtual currencies and is considering the consumer protection issues that these currencies present. This should hardly be a surprise. What might be a surprise is that the agency has given no specific indication that it has plans to issue rules or bring enforcement actions to vindicate their view of consumer interests in the digital currency marketplace. At the very least, one might have expected the agency to provide a sharper warning to digital currency companies not to mess with American consumers.
One hypothesis is that the agency might be uncertain about how much authority it actually has over digital currency companies. Digital currencies serve a financial function, so it is natural to assume that the Consumer Financial Protection Bureau may believe it has the power to protect consumers in digital currency transactions. However, a careful parsing of the CFPB’s enabling statute—which we assume the CFPB has conducted—reveals that this assumption isn’t as clear as one might suppose.
Unless a person is engaged in an activity that falls under the scope of one of certain federal consumer financial laws enumerated in Title X of the Dodd-Frank Act, the CFPB’s authority is largely limited to “covered persons” and their “service providers.” “Covered persons” are, basically, people who provide “consumer financial products or services” and their affiliates. As the name suggests, a “service provider” is, basically, a person who provides a material service to a covered person in connection with a consumer financial product or service.
The only enumerated federal consumer financial law that might conceivably reach digital currency products and services is the Electronic Fund Transfer Act, and even that would be a stretch. So the CFPB has jurisdiction over digital currency companies only if they are engaged in providing a financial product or service to consumers.
The Dodd-Frank Act’s list of products that qualify as financial products or services is long and comprehensive, and it identifies at least four categories of products and services directly related to payments. However, each category related to payments and money services seems to just miss digital currencies.
The CFPB might decide that its best bet for asserting jurisdiction over digital currency companies is a provision that says “providing payments or other financial data processing products or services to a consumer” is a financial product or service. Some digital currency companies might be considered to be providing payment processing services, if the CFPB interprets “payment processing” broadly. However, even the broadest possible interpretation of “payment processing” could not capture every product or service related to digital currencies.
One fall back for the CFPB is a provision that allows the agency to issue a rule declaring a product or service to be a “financial product or service.” To issue such a rule, however, the CFPB must determine that the product or service is either (1) “entered into or conducted as a subterfuge or with a purpose to evade any Federal consumer financial law;” or (2) “permissible for a bank or for a financial holding company to offer or to provide under any provision of a Federal law or regulation applicable to a bank or a financial holding company, and has, or likely will have, a material impact on consumer.” Finding that digital currency companies have structured their offerings to evade the application of federal consumer financial laws might be hard to justify. The CFPB might conclude that that many digital currency products and services are permissible for a bank or financial holding company to offer—but the CFPB would be in the position of opining on what banks and holding companies may and may not do with respect to digital currencies before the prudential bank regulators have weighed in on this question. The CFPB will be freer to act pursuant to this authority after the banking regulators address in which activities related to digital currency banks and holding companies are authorized to engage. However, financial institutions are not clamoring to enter the digital currency space, so bank regulators might not feel much pressure to address the issue soon.
The end result is that the CFPB might be aware of something that those who criticize it for not doing more haven’t focused on—that its ability to protect consumers in connection with digital currencies could be limited, at least for the time being.