Consumer Financial Protection Bureau

US watchdog mulls applying consumer protection provisions to digital assets

The U.S. Consumer Financial Protection Bureau (CFPB) is looking at applying the consumer protection mechanisms of the Electronic Fund Transfer Act (EFTA) to digital assets, according to Director Rohit Chopra.

“To reduce the harms of errors, hacks and unauthorized transfers, the CFPB is exploring providing additional guidance to market participants to answer their questions regarding the applicability of the Electronic Fund Transfer Act with respect to private digital dollars and other virtual currencies,” said Chopra at a Brookings Institution conference.

The CFPB is an independent government agency responsible for consumer protection in the financial sector, with jurisdiction over banks, credit unions, securities firms, payday lenders, and other financial companies. It was created as part of the Dodd-Frank reforms in 2010 in response to the global financial crisis.

Key to financial consumer protection is the EFTA, a piece of legislation from 1978 intended to protect consumers engaging in electronic fund transfers. It sets standards for transparency for financial institutions managing electronic fund transfers while limiting consumer liability for unauthorized transfers. Under the EFTA, financial institutions are required to notify customers of the circumstances in which they will be liable for fraudulent transfers.

It wasn’t clear that the EFTA applied to digital assets for a long time. The Act applies to individuals who hold an ‘account’ at a ‘financial institution’ primarily used for the electronic transfer of ‘funds.’ Until recently, whether these definitions captured digital asset exchange account holders was an open question. However, the Southern District of New York court recently ruled in Rider v Uphold HQ Inc. that digital assets should be considered ‘funds’ under the EFTA, meaning that the act applies to digital assets.

With added confirmation from the CFPB that the EFTA’s applicability to digital assets is becoming a priority for the agency, the idea that digital asset transfers are caught by the protections of the EFTA is a foregone conclusion.

If the EFTA does indeed begin being applied to digital asset companies, its requirements may catch the less compliant actors in the industry. For instance, the EFTA would require digital asset exchanges to notify customers of their liability for unauthorized transfers—something virtually none of them currently do. Pertinently, an exchange is not required to provide such notification to customers if there is no liability to the customer—meaning any exchange that does not do this is making a statement that it is willing to bear all customer losses that arise from unauthorized transactions.

This would be an enormous departure from the status quo position of ‘tough luck.’ Fortunately, that is an attitude the industry is fast moving away from with the help of fast-developing digital asset law and a growing body of precedent hammering out precisely how existing and incoming laws apply to the digital asset industry.

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