President Joe Biden’s cryptocurrency executive order put the nation’s two federal consumer protection regulators front and center in regulating digital money.
The Federal Trade Commission and the Consumer Financial Protection Bureau have largely taken a back seat to other financial regulators when it comes to crypto. But Biden’s March 9 order directed the CFPB and FTC to study how they can police crypto transactions for fraud and abuse, a mission both agencies are equipped to do.
“They’ve taken the position that crypto is not a consumer product, but as of [March 9] that position is done,” said Laurel Loomis Rimon, a partner with Paul Hastings LLP and a former CFPB attorney.
The FTC and CFPB have unique powers to protect consumers against “unfair” and “deceptive” acts and practices—with the CFPB also having additional powers to go after “abusive” acts and practices. Those broad enforcement authorities could play a major role in overseeing digital money and crypto exchanges, in key areas like fraud protection and consumer privacy.
Crypto has been treated almost solely as securities and commodities, leaving room for frauds that aren’t covered by regulators.
But cryptocurrencies have steadily been gaining acceptance among consumers, with some studies finding that as much as a quarter of the U.S. population having exposure to them.
Putting a consumer protection lens on cryptocurrency regulation will likely help stabilize the market by providing a bigger oversight umbrella, said Hilary Allen, a professor at American University Washington College of Law.
The FTC reported a tenfold increase in crypto scams from 2020 to 2021, including a number of get-rich quick schemes and fake celebrity endorsements involving lesser-known currencies.
“If you’re tamping down on the worst excesses of how consumers and investors are being treated, that makes it less likely that you’re going to have bubbles that cause a financial crisis,” she said.
Laying in Wait
The CFPB and FTC have largely ceded the field to the Securities and Exchange Commission and the Commodity Futures Trading Commission because cryptocurrencies have so far largely been used for “speculative trading purposes,” CFPB Director Rohit Chopra said in a March 11 interview on Bloomberg Television.
Biden’s order changes the regulatory calculus. It listed consumer protection first among the areas where cryptocurrencies have had “profound implications.”
The order is “a recognition that crypto is, for some segment of the population, starting to replace traditional systems for consumer transactions,” Loomis Rimon said.
Privacy Concerns
The CFPB and FTC can stake a regulatory claim in privacy enforcement of the crypto market, as they have data protection responsibilities in their DNA.
For example, the FTC’s Safeguards Rule requires financial institutions under the agency’s jurisdiction to have measures in place to keep customer information secure.
Both agencies also can bring claims that a cryptocurrency firm engaged in unfair and deceptive practices—and in the CFPB’s case, abusive practices too—if customer information wasn’t properly protected leading up to a data breach.