CFPB Proposes to Include Virtual Currency Transactions Under the EFTA

The Consumer Financial Protection Bureau (CFPB) issued a proposed interpretive rule that, if finalized as written, would bring certain virtual currency products and services, such as stablecoins and digital wallets, within the scope of the Electronic Funds Transfer Act (EFTA) and Regulation E. The interpretive rule proposes to treat certain issuers and providers of stablecoin and virtual currency accounts, which can be used by consumers to pay for goods and services, as “financial institutions” that must provide consumer protections to their end users.  Most significantly, this rule would hold providers liable for fraud, errors, and unauthorized transactions, which is a significant departure from the industry’s current practices that typically require users to protect their own accounts from fraud and errors and offer little or no recourse if a wallet or private keys are stolen or hacked.

The EFTA and Regulation E apply to electronic fund transfers that authorize a financial institution to debit or credit a consumer’s account. In the past, CFPB and market participants have only treated transactions involving asset accounts denominated in fiat currency as in scope, such as checking and savings accounts and prepaid accounts. The proposed rule would significantly expand the perceived scope of the EFTA and CFPB’s jurisdiction over the virtual currency industry. Comments on the proposed rule must be received by March 31, 2025.

How Does The Proposed Rule Interpret The Scope of The EFTA?

In general, the EFTA applies to providers of an electronic fund service that enables a consumer to debit or credit “funds” to or from a consumer-purpose account, and their service providers.  The proposed interpretive rule would clarify that the scope includes:

• A virtual currency wallet or store of stablecoins that enables consumers to withdraw funds, obtain cash, conduct person-to-person transfers, or pay for goods or services from various merchants; 
• A video game account that can be used to purchase virtual items from multiple game developers or players;
• Credit card “points” accounts that enable consumers to use points to purchase goods from multiple merchants; and
• Banks, credit unions, and trust companies that offer consumer accounts and electronic fund transfers, which are already covered by the EFTA. However, this proposed rule could expand the types of transactions that are covered by the EFTA, such as virtual currency purchase and sale transactions that debit or credit bank accounts and custody of stablecoin or virtual currency value.

The EFTA does not apply to:

• Commercial-purpose accounts and transactions;
• The purchase and sale of securities or commodities; and
• Account-holding financial institutions having assets of $100 million or less as of the end of the preceding calendar year (but limited provisions concerning loan payments and civil and criminal liability still apply to these small institutions).

How Does The Proposed Rule Interpret Key Definitions?

“Funds” includes virtual currency. The proposed rule interprets the term “funds” to include assets that act or are used like money, accepted as a medium of change, a measure of value, or a means of payment. Under this interpretation, stablecoins and other forms of virtual currency that work as a medium of exchange or a means of paying for goods or services are considered “funds” for purpose of the EFTA. In addition, the fact that a virtual currency fluctuates in value is irrelevant; as such, in addition to stablecoins, bitcoin, ether, and other types of virtual currencies frequently used as a medium of exchange would be considered “funds” for purpose of the EFTA under the proposed rule.

A virtual currency wallet or store of value is a regulated “account” if it has features functionally similar to deposit accounts or prepaid cards. Such features include paying for goods or services from multiple merchants, the ability to withdraw funds or obtain cash, or conducting person-to-person transfers. Whether an account resembles a deposit or prepaid account is facts-dependent.

Certain issuers and hosted wallet providers are regulated “financial institutions.” The EFTA covers entities that directly or indirectly hold a consumer account or provide electronic fund transfer services. This proposed rule would treat issuers of certain virtual currencies and virtual currency accounts, hosted wallet providers, and other service providers that facilitate a consumer’s access to their virtual currency wallet, as regulated financial institutions.

What Does The Proposed Rule Require Covered Providers To Do?

The proposed rule would require a provider of “account” or electronic fund transfer service to afford consumer protections to their users who use the account or service for personal or consumer purposes. For example, covered providers must:

• Provide disclosures about terms and costs of the account or service when a consumer obtains the account or service, and provide notice if those terms are to change;
• Provide periodic statements documenting a consumer’s transactions and balance on the account; 
• Investigate and resolve consumer complaints or reports of errors, including fraudulent and unauthorized transactions; and
• Most importantly, reimburse a consumer for errors, fraud, and unauthorized transactions. Subject to narrow exceptions, this requirement effectively means providers would be financially liable for alleged unauthorized transactions and errors if they cannot prove the consumer authorized the transactions and there was no error.

What Next?

It remains to be seen whether the proposed interpretive rule will be finalized or enforced under the new administration. Even if not withdrawn earlier, the proposed rule will likely receive intense comments from interested stakeholders. Please reach out to your Goodwin contacts to discuss how the proposed rule may affect your business model.

 

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.