The Consumer Financial Protection Bureau (CFPB) has proposed an interpretive rule aimed at addressing what it views as ambiguities in the application of the Electronic Fund Transfer Act (EFTA) and its implementing Regulation E to emerging payment mechanisms. The potential changes are relevant for crypto exchanges, digital gaming platforms, online marketplaces, and others. This development signals the Biden/Chopra CFPB's intention to influence the regulatory framework of the rapidly evolving landscape of financial technology and payment systems before new leadership takes control. The CFPB has opened the proposal for public comment through March 31, 2025.
Context of the Proposal
Passed in 1978, the EFTA was designed to regulate electronic fund transfers (EFTs) through consumer accounts, establishing rights and responsibilities for both financial institutions and consumers. The statute has since been interpreted to accommodate innovations in payments, including debit cards, payroll cards, and prepaid accounts. However, recent advancements in digital wallets, stablecoins, virtual currencies, and other emerging mechanisms have outpaced existing regulatory clarity.
In its notice, the CFPB cited its ongoing research into novel payment systems and identified gaps in consistent application of EFTA protections, which could harm consumers or create competitive disadvantages for certain market participants.
Key Elements of the Proposed Interpretive Rule
1. Expanded Definition of "Funds": The CFPB interprets "funds" under EFTA to include assets such as stablecoins and other fungible digital assets used as a medium of exchange or for payments. This interpretation aligns with some recent case law that has classified cryptocurrencies as "funds" in various legal contexts.
2. Broader Scope of "Accounts": The rule clarifies that the EFTA applies to "other consumer asset accounts," which may include virtual currency wallets, gaming platform accounts, and proprietary digital balance products, provided they are used for personal, family, or household purposes.
3. Consumer Protections: The interpretive rule emphasizes the importance of established consumer protections under EFTA, including error resolution, disclosure requirements, and limits on liability for unauthorized EFTs. The CFPB seeks to ensure these protections apply consistently across traditional and emerging payment systems.
4. Exclusions for Securities and Commodities: The proposed rule reiterates that EFTs primarily used to purchase or sell securities or commodities are generally excluded from Regulation E. However, accounts that facilitate payments using securities or commodities as "funds" remain covered.
Implications for Market Participants
The CFPB's proposed interpretive rule carries significant implications for cryptocurrency exchanges and other businesses facilitating cryptocurrency and digital payments. If adopted, the interpretive rule would require entities offering emerging payment solutions to evaluate their compliance with EFTA and Regulation E. Companies may need to enhance consumer disclosures, implement robust error resolution procedures, and ensure consistency in their treatment of digital assets. For cryptocurrency exchanges and custodial wallet providers, this could mean implementing systems to investigate and resolve transaction errors, even in decentralized or blockchain-based environments, and updating consumer-facing agreements to provide clear information about rights and liabilities under the Electronic Fund Transfer Act. These companies may face unique compliance challenges due to the decentralized nature of some digital assets. Even if the proposal is not ultimately adopted by the CFPB, financial institutions, payment platforms, and digital wallet providers will likely face increased scrutiny regarding their adherence to EFTA protections.
* * * * * *
The CFPB's proposed interpretive rule represents a step toward articulating a possible interpretation of the applicability of EFTA to emerging technologies. But given the upcoming change in leadership at the CFPB, which will revisit policies governing payments, there are several potential ways in which this interpretation might lack durability under the incoming administration. Regardless, with the proposal of the interpretive rule, there is now an opportunity for stakeholders to comment on the topic.