On November 7, 2023, the Client Monetary Safety Bureau (CFPB) introduced a discover of proposed rulemaking (NPRM) that might set up CFPB supervisory authority over sure nonbank firms “taking part in a marketplace for ‘general-use digital client cost purposes.’”
Overview
The CFPB seeks to topic nonbank firms that present digital cost wallets and purposes to the CFPB’s supervisory authority beneath the Client Monetary Safety Act (CFPA), much like the supervisory authority it at present workouts over banks, credit score unions, and different conventional monetary establishments.
The CFPB’s press launch on the NPRM notes the precise goals of guaranteeing that giant nonbank firms adhere to relevant funds switch, privateness, and different client safety legal guidelines, and fostering a degree enjoying area amongst such firms and depository establishments on the subject of monetary safety. The CFPB expresses specific concern over compliance with the CFPA’s prohibition on unfair, misleading or abusive acts and practices (UDAAP), the privateness provisions of the Gramm-Leach-Bliley Act and its implementing Regulation P, and the Digital Fund Switch Act and its implementing Regulation E.
Whereas coated entities had been already required to adjust to these and different relevant statutes and laws, subjecting them to CFPB supervision would topic them to extra regulatory oversight. The supervisory authority would permit the CFPB to (1) assess compliance with client monetary legal guidelines, (2) get hold of details about such individuals’ actions and compliance techniques and procedures, and (3) detect and assess dangers to client and client monetary markets info. The CFPB could be permitted to conduct examinations of supervised entities, together with on-site assessment of compliance insurance policies, processes, and procedures; take a look at transactions and accounts for compliance; and consider the corporate’s general compliance administration system. The NPRM warns that, “[e]xaminations could contain issuing confidential examination experiences, supervisory letters, and compliance rankings.”
The NPRM wouldn’t impose new substantive restrictions on the entities topic to the CFPB’s expanded supervisory authority. Nevertheless, the CFPB clarifies that its expanded supervisory jurisdiction would “allow [it] to watch for brand spanking new dangers to each customers and the market,” which is “important as new product choices blur the standard strains of banking and commerce.” In different phrases, nearer scrutiny of nonbank entities within the digital funds house might spur extra regulation, whether or not through UDAAP, revised or expanded implementing laws, coercive non-binding steering, or different means.
Accordingly, the NPRM will possible have vital implications for the digital funds trade. It’ll place an expanded burden on coated entities to keep up and supply compliance and associated documentation to the CFPB, will topic them to the identical supervisory authority as banks on this house, and should effectively present the idea for expanded regulation over how purposes perform and over the varied kinds of “funds” transferred amongst customers, amongst different areas.
Key Definitions
Beneath the NPRM, a nonbank firm could be topic to supervision by the CFPB as a “bigger participant” if it:
- has an annual quantity of at the very least 5 million client cost transactions;
- will not be a small enterprise, as outlined by the Small Enterprise Administration (SBA);
- gives “a coated cost performance” – i.e., a funds switch performance, a pockets performance, or each – by way of a digital software; and
- gives such cost performance for customers’ basic use in making a “client cost transaction.”
A CONSUMER PAYMENT TRANSACTION HAS FOUR COMPONENTS:
- it should lead to a switch of funds by or on behalf of the buyer. “Funds” embody fiat foreign money, authorized tender, and digital belongings, together with cryptocurrency (although, as famous beneath, the change of 1 kind of funds for one more, akin to crypto for fiat, is not coated);
- the buyer initiating the transaction should be bodily situated in the USA;
- the funds switch should be made to a different individual in addition to the buyer that initiated the switch, which may very well be one other client, a enterprise, or another kind of entity. This might exclude, for instance, ATM withdrawals; and
- the funds switch should be primarily for private, household, or family functions.
THE DEFINITION OF “CONSUMER PAYMENT TRANSACTION” WOULD EXPLICITLY EXCLUDE:
- worldwide cash transfers (as outlined in and controlled by the CFPB’s Remittances Rule);
- a switch of funds by a client that’s linked to the buyer’s receipt of one other type of funds, together with the change of fiat currencies or digital belongings or the acquisition or sale of a digital asset with or for fiat foreign money, or that isn’t an “digital funds switch” as outlined by Regulation E beneath 12 CFR § 1005.3(c)(4);
- a transaction performed by an individual from their very own on-line or bodily retailer or market for the sale or lease of products or providers; and
- an extension of client credit score made utilizing a digital software supplied by the one who is extending the credit score or its affiliate.
Observe on Digital Belongings
The NPRM states that crypto-assets, together with digital foreign money, represent “funds” beneath the CFPA, and due to this fact, the switch of funds within the type of crypto-assets “by or on behalf of a client bodily situated in a State to a different individual primarily for private, household, or family functions” would qualify as a “client cost transaction,” except one of many exclusions to that time period applies.
Notably, the NPRM proposes to exclude from the definition of “client cost transaction” a transaction “for the aim of exchanging one kind of funds for one more, akin to exchanges of fiat currencies … a purchase order of a crypto-asset utilizing fiat foreign money, a sale of a crypto-asset by which the vendor receives fiat foreign money in return, or the change of 1 kind of crypto-asset for one more kind of crypto-asset.”
Subsequently, in its present type, it’s cheap to imagine that the NPRM applies to transactions involving digital belongings as follows:
- fiat-to-crypto and crypto-to-crypto buying and selling exercise on digital asset exchanges would not be coated;
- cost purposes enabling customers to buy items and providers utilizing cryptocurrency, together with stablecoins, could be coated; and
- different actions, such because the switch of digital belongings between customers, unrelated to change exercise, could be coated.
CFPB jurisdiction will not be unique, so entities that develop into topic to CFPB supervision by advantage of partaking within the above actions would stay topic to current federal and state regulatory necessities, as applicable.
Remark Interval
The CFPB invitations feedback on all elements of the NPRM. It additionally requests feedback on every of the precise definitions, proposals, and standards proposed by the NPRM.
The remark interval for this NPRM closes on January 21, 2024.
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For added info on this proposed rulemaking or help in getting ready a remark, please contact a member of Steptoe’s Monetary Regulatory Compliance and Coverage Apply or Blockchain and Cryptocurrency Apply.