CMFA Analyst: Problems with U.S. Consumer Financial Protection Bureau’s proposed digital wallet rules

"The CFPB’s attempt to exercise regulatory authority over the digital payment app market without identifying specific risks to consumers demonstrates fundamental flaws in the agency’s regulatory approach. "

**Written by **Jack Solowey

Compiled by: TaxDAO

When you use a product that is subject to government regulation, you may believe that regulation is necessary for the smooth functioning of the product or its industry. However, when regulators first propose special regulations years after a product has performed as expected, you may be tempted to ask, “Why is regulation even needed?”

When it comes to the Consumer Financial Protection Bureau’s (CFPB) proposal to bring popular payment apps like Apple Pay, Google Pay, PayPal, Venmo, and Cash App into the regulatory framework, the CFPB’s answer to the question is: Apps are quite popular. Welcome—the CFPB sees success only as justification for tighter oversight.

The market for digital payment apps doesn’t desperately need regulators to bail out consumers, and the CFPB’s proposed rules provide a real-time demonstration of how regulators won’t hesitate to “fix” something, even — and maybe, especially — In case - as the old saying goes “it ain’t broke”.

This month, the CFPB proposed designating major digital consumer payment apps as “larger players” in the consumer financial services market, placing them under agency supervision. The Dodd-Frank Act gives the CFPB authority to regulate these larger players, meaning that the CFPB can proactively monitor and inspect these specific businesses in addition to having the ability to take enforcement actions for violations of consumer financial protection laws.

The proposed rule proposes that covered digital payment applications will be subject to a range of potential CFPB regulatory activities, including records requests, regulatory meetings, records reviews, and on-site inspections for compliance assessments, reports, and ratings. These screening exams take about eight to ten weeks on average.

When a business tries to get work done, all this mess brings to mind Homer Simpson supervising a team of engineers:

Homer: “Are you working?”

Engineers: “Yes, sir.”

Homer: “Can you try harder?”

Who exactly would be regulated by the CFPB under this proposal? The proposed rules would cover providers of “universal digital consumer payments” applications (including funds transfer and digital wallet applications) that meet transaction volume (5 million transactions per year) and company size (not covered by the law). of small businesses). The proposal contains some notable exceptions, including an exemption for apps that only facilitate payments for specific goods or services (i.e. not for general use), as well as an exemption for transactions with marketplaces through those marketplaces’ own platforms.

The proposal mentions “digital wallets,” raising another question as to whether cryptocurrency transfers and wallets are within the scope. The answer is: “Maybe.”

According to the CFPB, covered fund transfers include crypto transfers, so the rule may cover managed crypto wallets used for these purposes (where the service provider controls the private keys that access user funds). However, the proposed rule does not cover the purchase or trading of cryptocurrencies, as it does not cover the exchange of one form of funds for another, and also does not cover purchases regulated by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). Regulated securities and commodities. (The unresolved question of SEC and CFTC jurisdiction over cryptocurrencies creates unhelpful regulatory ambiguity.)

The application of the proposed rule to self-hosted crypto wallets (where users control their own private keys) may depend on interpretive issues (including issues related to the definition of “wallet function”), which may leave institutions with the option of including certain self-hosted wallets. regulatory space. (If the CFPB goes this route, it would be yet another example of subjecting core cryptography to poorly conceived regulation.)

When it comes to the CFPB’s reasons for proposing this proposal, perversely, the very data that shows that the digital payment application market has not collapsed at all is cited by the CFPB as the basis for special regulation of the market. “The CFPB proposes to regulate non-bank insured persons, which are the larger players in this market because of its enormous and growing importance to consumers’ daily financial lives.” Another way to put it is that simply satisfying consumption The needs of investors require more stringent scrutiny.

How popular are these apps? According to the CFPB itself, 76% of Americans have used one of the four major payment apps; 61% of low-income consumers reported using a payment app; merchant acceptance of payment apps “comes as businesses seek to make consumers more “It is rapidly expanding by making it as easy as possible for consumers to make purchases with their preferred payment method”; adoption by younger users is likely to drive further growth.

Survey data alone tend to support the idea that consumers’ positive reviews of these apps are consistent with their revealed preferences. According to 2017 Morning Consult survey data, a significant number of U.S. adults are very or somewhat satisfied with various digital payment apps, including Venmo (71%), Apple Pay (82%), Google Wallet (79%), and PayPal (91%). Recently, some have even tried to frame Apple Pay as making payments “too easy” for the benefit of consumers.

The CFPB’s proposal is not an example of regulators seeking to create much-needed order in a fragmented and lawless industry, but rather an example of an agency increasing compliance requirements in an area that is already regulated. For example, consumer financial products and services (including consumer payment services provided through any technology) are already subject to the CFPB’s authority to enforce prohibitions on unfair, deceptive, or abusive practices. Additionally, the CFPB already has the authority to supervise covered financial services providers and can issue orders if it has reasonable cause to determine that a provider poses a risk to consumers, but the agency failed to do so in any convincing way in the proposal at this point.

The CFPB’s attempt to exercise regulatory authority over the digital payment app market without identifying specific risks to consumers demonstrates fundamental flaws in the agency’s regulatory approach.

In the case of digital payment applications, the proposed regulatory regime is not directed at the failure of the consumer financial services market, but rather at the market’s success. At this point, we have to ask: What other regulatory systems that consumers take for granted were originally started to solve problems?