The CFPB Wants To Regulate Crypto

WASHINGTON, DC – DECEMBER 15: Consumer Financial Protection Bureau Director Rohit Chopra testifies … [+] before the Senate Banking, Housing and Urban Affairs Committee. (Photo by Chip Somodevilla/Getty Images)

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It seems each U.S. regulator wants their piece of the crypto oversight pie. Last week, the Consumer Financial Protection Bureau proposed to carve out examination authority over the country’s largest payments companies. Their proposal, if it goes unchanged, will give the Bureau enhanced authority over crypto companies, even those companies already regulated as money transmitters.

Large companies dabbling in crypto must already deal with regulatory inquiries from a veritable alphabet soup of agencies. Now, the Bureau has shown its hand.

Its proposal begins with the assumption some payments companies are too big to ignore. The proposal expects 17 of the largest digital consumer payments companies will be subject to the rule, covering 88% of known consumer transactions in the nonbank market. Importantly, the proposal references six “tech giants” with payments services: Amazon, Apple, Facebook, Google, PayPal, and Square.

The proposal also revealed the Bureau looked long and hard at crypto-specific “transaction and revenue data” from Elliptic Enterprises Limited. They left no hints as to which crypto companies could be affected.

With the new proposal in place, federal examiners would gain unprecedented access to the books, records, and chat logs of nonbank financial institutions, including money transmitters that accept and transmit digital assets. The feds would be free to dig deep and search for instances of consumer harm.

Yet while the proposal seeks new examination powers, it does not seek much else. It makes no request for neither new prescriptive rules nor new enforcement authority. If enforcement occurs after an exam, it would only be because the examiner discovered a violation of an existing rule.

While this may seem like a silver lining, the rulemaking suggests the Bureau has taken a fresh look at existing rules and decided anew how they should touch crypto transactions. Historically, Regulation E (which applies to electronic funds transfers) has not been a topic of discussion among compliance officers at crypto companies. The Bureau’s proposal gives the first ever indication that “funds” under Regulation E should include “digital assets that have monetary value and are readily useable for financial purposes, including as a medium of exchange.” This entirely brand new position could make virtual currency transactions subject to Regulation E.

The Bureau also noted its enforcement authority to prevent unfair, deceptive, or abusive acts or practices may be invoked after an examination. This authority, broad and expansive as it is, gives the Bureau latitude to punish a range of business practices it finds unpalatable for consumers.

The Bureau’s view would cause tremors in the compliance departments of the largest crypto exchanges. Fortunately, regulators cannot make new rules without first seeking, reading, and responding to public input. Anyone wishing to limit the rule has until January 8, 2024, to submit their comments.