Submitted via electronic submission at https://www.regulations.gov
January 8, 2024
Re: Crypto Council for Innovation Comment on CFPB’s Proposed Rulemaking on Defining Larger Participants of a Market for General-Use Digital Consumer Payment Applications (Docket No. CFPB–2023– 0053; RIN 3170–AB17)
CCI is a global alliance of industry leaders within the digital assets industry and is committed to promoting the advantages of digital assets while showcasing their potential for transformation. CCI’s members represent various sectors within the digital asset ecosystem and share a common objective: advocating for responsible global regulation of digital assets to unlock economic opportunities, enhancing quality of life, promoting financial inclusivity, safeguarding national security, and countering illicit activities. CCI firmly believes that achieving these objectives necessitates well-informed, evidence-driven policy choices achieved through collaborative participation.
To this end, CCI has long championed the development of modern, coherent, and fit-for-purpose policy frameworks to foster responsible crypto innovation in the United States. In particular, CCI supports the development of a robust, regulated, and vibrant crypto market in which individuals can participate with confidence that consumer protections are in place. Currently, the States have established state-based regulatory frameworks for crypto market participants. At the federal level, Congress is now working to establish a comprehensive regulatory framework, which would, among other things, provide the Commodity Futures Trading Commission (CFTC) with oversight over digital asset commodity activity and the Securities and Exchange Commission (SEC) with oversight over clearly defined digital asset securities activity, tailored to the unique characteristics of these activities. However, regulatory ambiguity and fragmentation resulting from the unexpected introduction of an overly broad supervisory regime based on insufficient market analysis can undermine consumer protection, reduce industry certainty, and chill further responsible innovation.
Against this backdrop, we have deep concerns with the CFPB’s proposed rulemaking that would serve to increase regulatory fragmentation and ambiguity by seeking to expand the Bureau’s examination authority over activity that is inconsistent with historical practice and the plain language of the CFPA. For the first time, and absent any congressional directive or prior industry engagement, the Bureau is looking to broadly sweep into its supervisory oversight digital asset activity that is already regulated under state and other federal frameworks. This effort would further create regulatory ambiguity regarding the application of broader CFPB payments rules and fail to establish which specific rules and regulations the Bureau would apply to digital asset activities in exercising its purported examination authority. Our feedback and recommendations below will accordingly detail the following points:
A. The CFPB’s assertion of examination authority over entities in the digital assets market under the Proposal would result in significant unintended consequences and create uncertainty as to the regulatory obligations of market participants.
B. The CFPB should not use a larger participant rulemaking to assert examination authority over the digital assets market in light of the market’s unique characteristics, the already-existing regulatory framework under state law, and on-going Congressional efforts to establish a tailored federal regulatory framework.
C. The Proposal’s assertion of examination authority over entities in the digital assets market is inconsistent with the plain language of the CFPA.
I. The CFPB’s assertion of examination authority over entities in the digital assets market under the Proposal would result in significant unintended consequences and create uncertainty as to the regulatory obligations of market participants.
The CFPB claims authority to examine nonbanks under the Proposal for purposes of assessing compliance with federal consumer financial law, including the Electronic Fund Transfer Act (EFTA) and its implementing Regulation E.1 We note that the CFPB has stated in the Proposal that it is not seeking to impose new substantive consumer protection requirements or alter the scope of the CFPB’s other authorities, yet, for the reasons stated below, the Proposal would do just that with respect to digital assets and, as a result, create further regulatory confusion.
It is a central tenet of administrative law that “regulated parties should know what is required of them so they may act accordingly.”2It is likewise well-established that “precision and guidance are necessary so that those enforcing the law do not act in an arbitrary or discriminatory way.”3 Yet, the Bureau’s assertion of examination authority over entities facilitating certain digital asset transactions under the Proposal would create ample room for precisely that improper outcome. That is because the CFPB has failed to set forth what rules would apply to that activity and how digital asset market participants should expect to be assessed in their compliance. As courts have acknowledged, the text of the EFTA does not expressly address its applicability to digital asset transactions.4 Moreover, Regulation E exempts from its coverage “[a]ny transfer of funds which has as its primary purpose the purchase or sale of securities” where the security or commodity is regulated by the SEC or CFTC, or is purchased or sold through an SEC-regulated broker-dealer or CFTC-regulated futures commission merchant.5 Although the CFPB has vaguely stated that its rules under the EFTA “may have potential application” to digital assets and related products and services, it has never resolved the fundamental question of whether they actually do—much less addressed the numerous specific issues relating to how such rules would apply to the distinctive technological attributes of digital assets and the products and services tied to them, discussed below.6
Rather, the CFPB declared in 2016 that it has not taken a position regarding whether the EFTA applies to digital assets because it “continues to analyze the nature of products or services tied to virtual currencies”—and it has not provided any further regulatory clarity since then.7In its November 2022 bulletin analyzing crypto-asset complaints, the CFPB continued to decline to provide regulatory clarity on the application of the EFTA and other federal consumer protection laws to digital assets, stating: “Inclusion of narratives in this report are for illustrative purposes only and do not represent a determination made by the CFPB about its legal authorities.”8In an October 2023 speech, Director Chopra stated that the CFPB is still in the exploratory stages of providing additional guidance to market participants to answer questions regarding the applicability of the EFTA to digital assets.9 The Proposal provides no meaningful guidance on these questions.
Given that the CFPB’s analysis of digital assets, including the applicability of the EFTA to such products and services, is ongoing—and fundamental regulatory questions still remain unresolved—the Proposal’s extension to digital assets would result in significant uncertainty. Market players cannot be fairly assessed for compliance by the CFPB under its CFPA examination authorities unless they can first determine whether and how existing regulations apply to them. We are concerned that the Proposal would create unnecessary and highly disruptive ambiguity as to what regulations apply to the digital asset market and the CFPB’s supervisory expectations. Indeed, the ultimate effect of the CFPB’s exercise of examination authority over entities in the digital assets market under the Proposal would be to vest CFPB examiners with nearly unfettered discretion to collect information and leave ample room for arbitrary enforcement. We therefore respectfully urge the CFPB to exclude digital assets from the scope of this rule.
II. The CFPB should not use a larger participant rulemaking to assert examination authority over the digital assets market, in light of the unique characteristics of digital assets, the already-existing regulatory framework under state law, and on-going Congressional efforts to establish a federal regulatory framework.
The current regulatory landscape for digital assets in the United States is already marked by fragmentation and ambiguity. States have developed fit-for-purpose licensing and oversight frameworks specifically tailored to digital assets, and lawmakers in Congress have been working on bipartisan proposals to clarify federal oversight, largely looking to provide the CFTC with spot market oversight of digital commodities and the SEC with oversight over more clearly defined digital securities.10Indeed, the CFPA itself carves out from CFPB authority any financial advisory services provided by an SEC-regulated entity, and specifically provides that the CFPB has no enforcement authority with respect to CFTC-regulated entities.11
As the CFPB notes in the Proposal, its assertion of jurisdiction over digital assets through this rulemaking will result in overlap with state regulators12—thereby adding further complexity to the regulatory landscape in this country. The result would be duplicative and unnecessary regulation of digital assets, leading to additional confusion rather than furthering the goal of consumer protection. This regulatory confusion and unnecessary burden would be exacerbated by the Proposal’s approach of broadly applying supervisory oversight to all activities of a covered person that involve consumer financial products or services or implicate federal consumer financial law.13
Additionally, the Proposal front-runs Congress by seeking to force-fit a payments-focused supervisory regime over diverse and evolving digital asset activities, which would inject further uncertainty for consumers, market participants, and all state and federal regulators. For example, it is unclear exactly what types of digital asset-related consumer financial products and services the Proposal would cover in the first place. As the CFPB has itself noted, a variety of digital asset-related products and services exist, each with their own risk profiles: “Crypto-assets can be stored via accounts, digital wallets, or both. Wallets can either be custodied with a crypto-asset platform or service or kept in a software or hardware wallet (on a device such as a USB drive) that is sometimes referred to as “unhosted” wallets.”14 We suggest the CFPB make it clear that non-custodial wallet providers fall outside of the definition of “wallet functionality,” insofar as such wallets are controlled entirely by individual owners who hold the private key to their funds—this is particularly so because non-custodial wallet providers merely provide the technology necessary for a user to store their own funds while maintaining control over their own credentials.
The Proposal is similarly flawed in its use of blanket terms such as “digital asset,” “crypto assets,” and “virtual currency” to encompass a variety of distinct technologies, with varying operational designs, and treating them all as of the same ilk as the payment services of tech giants. Yet, as the CFPB itself has noted: “Over the past decade, the sheer number of crypto-assets has vastly expanded. One estimate puts the count of total crypto-assets at more than 1.8 million.”15 Different digital assets may have different operational characteristics and consumer protection implications, for which the Proposal fails to account. The functionalities and user behaviors with respect to an unhosted wallet provider in connection with a decentralized digital asset (i.e., those created and maintained by an open network of participants, none of whom individually can unilaterally change how the digital asset functions), for example, are fundamentally different from those of a traditional payment app (capable, e.g., of reversing transactions, perhaps to make consumers whole in the event of fraud or theft)—raising fundamentally different consumer protection implications. As discussed above, the outcomes of the CFPB’s attempts to analyze digital asset-related products and services are unclear, and the CFPB has not sought to provide risk-based, right-sized regulatory guidance tailored to digital assets to protect against consumer harm. This example underscores why injecting further ambiguity into digital asset regulation in the United States is not only outside of the Bureau’s remit, but is also not good policy.
To the extent a new regulatory regime should be created for the digital asset space, a new legislative framework in the purview of Congress would provide the appropriate foundation for clear consumer protections that are fit-for-purpose. Rather than disrupt the market with an ambiguous and impracticable examination regime under the Proposal, we believe the much better approach is for the CFPB to recognize the existing role of peer state and federal regulators, while deferring policy decisions to Congress. We accordingly urge the Bureau to remove digital assets from the scope of its rulemaking under the CFPA.
III. The Proposal’s assertion of examination authority over entities in the digital assetsmarket is inconsistent with the plain language of the CFPA.
Although the CFPB has asserted rulemaking and enforcement authority under other consumer protection statutes outside the Proposal, such as the EFTA, the CFPB relies in the Proposal on the CFPA as the statutory basis for its proposed examination authority. Digital assets like Bitcoin have been in the market for more than a decade—pre-dating the founding of the CFPB—and at no point has the Bureau asserted that the CFPA provides the agency with examination authority broadly with respect to these instruments, until now.
The reason the CFPB has never asserted such authority is because the CFPA does not cover activities relating to digital assets. In particular, the Proposal would interpret the term “funds” as used in the CFPA to include any digital assets that “have monetary value and are readily usable for financial purposes.”16 However, the plain language of the CFPA undercuts such an expansive interpretation. The CFPA gives the CFPB examination authority with respect to only certain specific consumer financial products or services as enumerated in the statute. These categories include the “transmitting or exchanging of funds” and “providing payments or [certain] other financial data processing products or services to a consumer.”17 The CFPB refers to these two particular categories in describing the statutory basis for its Proposal. 18 As used in the CFPA, these categories have specific, limiting definitions. Section 5481 of the CFPA defines “transmitting or exchanging of funds” as receiving actual “currency, monetary value, or payment instruments” from a consumer with the specific purpose of exchanging or transmitting the same.19Importantly, nothing in the statutory text authorizes the CFPB to examine entities with respect to financial products or services that broadly involve the transmitting or exchanging of any assets just because they have monetary value and are readily usable for financial purposes—as the Proposal does. Rather, the Proposal’s overbroad approach to digital assets is inconsistent with the plain language of the CFPA.
In addition, the CFPB’s overly broad interpretation of “funds” as used in the CFPA with respect to digital assets would substantially deviate from the CFPA’s statutory structure. The CFPA draws clear distinctions with respect to financial products or services that relate to funds, stored value, payment instruments, and securities, with explicit carveouts and tailored exceptions for each asset or instrument.20 No reasonable interpretation of that statutory language would view the term “funds” as subsuming all other assets and instruments—that is, as broadly covering any digital asset that has monetary value and can be readily usable for financial purposes, as the Proposal does. Even a June 2023 report by the CFPB Office of Competition and Innovation and Office of Markets recognized this nuance, referring to products and services to facilitate crypto asset transactions as separate from the core funds transfer services of nonbank payment platforms.21 Although the Proposal cites various case law where courts have relied on dictionary definitions to find that certain crypto assets constitute “funds” for purposes of other federal statutes,22the CFPB, as a federal agency, is constrained by specific statutory mandates and authorities, as described above with respect to the CFPA. As such, the CFPB cannot choose federal statutes that may better suit its purpose, like the RICO Act and the other federal statutes referred to in the case law the Proposal cites, which are unrelated to the CFPA, inconsistent with its plain language, and substantially deviate from its statutory structure.
It is also important to mention how this rulemaking deviates from the intent of the CFPB’s market monitoring order that prompted the Proposal to begin with. 23In October 2021, the CFPB requested information from “Big Tech” companies on their payment system plans.24 The agency made efforts to follow up, including by seeking further information and launching a public inquiry on Big Tech platforms in 2023. In 2022, the CFPB warned Big Tech firms that they must adhere to federal consumer financial protection laws when using sophisticated behavioral targeting techniques to market financial products, such as algorithmic models or other analytics.25In all of the CFPB’s efforts and inquiries leading up to this proposed larger participant rulemaking, the Bureau has never once mentioned digital assets and instead focused its attention on the unrelated market dynamics of large technology companies. There are no precedent or historical records indicating the CFPB has authority nor interested intent in capturing digital assets under its CFPA examination authority until now. If that was the case, it would have been beneficial for the agency to include digital assets in its previous inquiries in order to help inform the development of this proposal. Without that request for information, the CFPB has not sufficiently informed itself of all of the complexities of digital assets that should be taken into consideration before attempting to capture them under the CFPA’s definition of “funds” in this proposal. For that reason, among others, digital assets should be excluded from the scope of the rule.
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CCI again appreciates the opportunity to provide these comments and your consideration of our recommendations. We would be pleased to further engage on the comments detailed in this letter and ways to ensure the responsible growth of the digital asset industry.
Sheila Warren, Chief Executive Officer
Ji Hun Kim, General Counsel & Head of Global Policy
1 Proposed Rule at 80,212.
2 F.C.C. v. Fox Television Stations, Inc., 132 S. Ct. 2307, 2317 (2012).
4 See Yuille v. Uphold Hq, Inc., 22-cv-7453 (LJL) (S.D.N.Y. June 9, 2023).
7 81 Fed. Reg. 83,934 (Nov. 22, 2016), at 83,978-83,979.
8 CFPB, Complaint Bulletin: An analysis of consumer complaints related to crypto-assets (Nov. 2022) (2022 CFPB Bulletin).
9 Rohit Chopra, Director, CFPB, Prepared Remarks at the Brookings Institution Event on Payments in a Digital Century (Oct. 6, 2023).
10 See, e.g., Financial Innovation and Technology for the 21st Century Act, H.R. 4763, 118th Cong. (2023), https://tinyurl.com/yc38dmjn; Digital Commodity Exchange Act of 2022, H.R. 7614, 117th Cong. (2022), https://tinyurl.com/45cnjwyd (defining “digital commodity” and providing CFTC regulatory jurisdiction over digital commodity markets); Digital Commodities Consumer Protection Act of 2022, S. 4760, 117th Cong. (2022), https://tinyurl.com/bdd7r5p3 (amending Commodity Exchange Act to provide CFTC regulatory jurisdiction over the digital commodity spot market).
16 CFPB, “Defining Larger Participants of a Market for General-Use Digital Consumer Payment Applications” 88 Fed. Reg. 80,197, at 80,202 (Nov. 17, 2023) (Proposed Rule).
17 12 U.S.C. 5514(a)(1)(B); 12 U.S.C. 5481(15).
18 Proposed Rule at 80,199, footnote 23.
19 12 U.S.C. 5481(29).
20 12 U.S.C. 5481(15)(v) (including in the definition of “financial product or service” providing or issuing stored value or payment instruments, except that, in the case of a sale of, or transaction to reload, stored value, only if the seller exercises substantial control over the terms and conditions of the stored value provided to the customer subject to certain conditions); 12 U.S.C. 5481(15)(viii) (carving out of the definition of “financial product or service” services relating to securities provided by a person regulated by the SEC or a person regulated by a State securities Commission so long as such person acts in a regulated capacity); 12 U.S.C. 5481(18) (defining the term “payment instrument” as a check, draft, warrant, money order, traveler’s check, electronic instrument, or other instrument, payment of funds, or monetary value other than currency); 12 U.S.C. 5481(28) (defining stored value as funds or monetary value represented in any electronic format and stored or capable of storage on electronic media in such a way as to be retrievable and transferred electronically, except that the term does not include special purpose cards or certificates).
21 Analysis of Deposit Insurance Coverage on Funds Stored Through Payment Apps, CFPB Office of Competition and Innovation and Office of Markets (Jun. 1, 2023) (“[Providers of d]igital payment solutions . . . now often provide mobile apps and standard functions—like sending money to friends or transferring funds to a bank account—to consumers for free. They generate revenue in various other ways, that include—but are by no means limited to— . . . charging consumers for additional features (e.g., expediting the transfer of funds to their bank accounts, buying and selling crypto assets, using a credit card to send payments, etc.); and through ancillary products and services. . . . While the core service of nonbank payment platforms is to provide a mechanism to send funds from one person to another, these apps also facilitate a growing set of related financial products and services, including offering debit cards, credit cards, “buy now, pay later” (BNPL) loans, international remittances, and crypto asset transactions.”) (emphasis added).
22 Proposed Rule at 80,202, footnote 51.
23 “CFPB Proposes New Federal Oversight of Big Tech Companies and Other Providers of Digital Wallets and Payment Apps,” CFPB Press Release (Nov. 7, 2023)(“Today’s proposed rule, if finalized, would be one part of the CFPB’s efforts to carefully monitor the entry of large technology firms, including Big Tech giants, into consumer financial markets. . . . In 2023, the CFPB followed up on a 2021 request to Big Tech companies for information on their payment system plans with more detailed orders to ascertain more information on their use of sensitive personal data, and highlighted the role of certain Big Tech firms in limiting competition and innovation in mobile payments.”) (emphasis added). 24 “CFPB Orders Tech Giants to Turn Over Information on their Payment System Plans,” CFPB (Oct. 21, 2021).
25 “CFPB Warns that Digital Marketing Providers Must Comply with Federal Consumer Finance Protections,” CFPB (Aug. 10, 2022).