The CFPB’s New Proposed Rule to Protect Crypto Consumers from Theft

By Mauro M. Wolfe and Carolina Goncalves

Like banks, cryptocurrency firms are not immune from attacks designed to steal consumer assets, which attacks reportedly caused billions in crypto losses for consumers in 2024 alone. As a result, the US Consumer Financial Protection Bureau (CFPB) proposed a rule intended to protect crypto users from illicit activities by requiring cryptocurrency firms to reimburse consumers for stolen funds. The Electronic Funds Transfer Act (EFTA) and Regulation E currently limit consumer liability for unauthorized electronic fund transfers (EFTs) and impose investigation and error resolution obligations (e.g., funds in reserve) on financial institutions when notified that a consumer’s funds have been compromised. The proposed rule would provide similar consumer protections in the event of an unauthorized cryptocurrency transfer from an account established primarily for personal, family, or household purposes.

The EFTA and Regulation E apply to an EFT authorizing a financial institution to debit or credit a consumer’s account. The CFPB’s definition of “financial institution” includes nonbank entities that (a) hold a consumer account or (b) issue an access device and agree with a consumer to provide EFT services. The CFPB has also determined that “funds” include digital assets, like stablecoins, that operate as either a medium of exchange or as a means of paying for goods and services. The CFPB’s definition of “account” is also broad enough to include nonbank asset accounts (e.g., accounts on gaming platforms, virtual currency wallets) with features similar to those of more traditional deposit or savings accounts, such as paying for goods or services from multiple merchants, having the ability to withdraw funds or obtain cash, or conducting person-to-person transfers.

The proposed rule intends to establish a more consistent application of the EFTA and Regulation E to a range of “emergent payment mechanisms” by requiring “market participants offering new types of payment mechanisms to facilitate electronic fund transfers [to] understand whether their account meets the definition of ‘other consumer asset account,’ including whether it is established for ‘personal, family, or household purposes.’” The proposed rule is open to public comments until March 31.

We anticipate material changes to digital asset and blockchain policy when the next chapter begins under the Trump administration. The broader question for consideration is where consumer protection will fit within crypto regulations. We hope for the benefit of retail investors that it is of paramount importance.

California Requires Digital Storefronts to Avoid “Sales” Terms and Provide License Terms

A new California law, AB 2426, signed by Governor Gavin Newsome on September 24, 2024, requires any company offering online-only digital goods to California consumers using “buy,” “purchase” or similar terms to clarify whether or not the goods are a transfer of ownership or are instead a license to the purchaser.

In essence, the law bans digital storefronts from using terms like “buy” or “purchase” if there is no transfer of ownership unless they also inform customers that they are not getting unrestricted access to the digital items they are paying for. Online sites using “buy,” purchase” or similar terms when offering digital goods will have to prominently state that customers are getting a license that can be revoked and provide the terms of the license. Companies that do not could be fined for false advertising or potentially sued by consumers.

Read the full story on the Duane Morris LLP website.

Swift Pilots Live Digital Asset Transactions Beginning in 2025

By Joe Silvia

On October 3, 2024, the Society for Worldwide Interbank Financial Telecommunication (“SWIFT”), the global bank messaging network, announced plans to allow global financial institutions the ability to use its platform to conduct pilot transactions for the settlement of digital assets and currencies starting in 2025. This announcement is just the latest advancement for the digital assets ecosystem as it moves the settlement of digital assets and currencies from Swift experimentation to live transactions.

Swift indicated that “these trials will demonstrate how financial institutions can transact interchangeably across both existing and emerging asset and currency types using their current Swift connection” and the “trials aim to address a key challenge in the continuously evolving digital asset market: the rise of disconnected digital platforms, or ‘digital islands’, that could hinder more widespread adoption and ease of use for new forms of value.” Swift notes that its ultimate vision in this space is to give financial institutions a single point of access to multiple digital asset classes and currencies, and this move to pilot transactions “marks an important milestone” toward that ultimate vision.

While the announcement reflects the continued interest and demand for further integration of digital assets in the global financial system, we anticipate continued sluggish progress to that end given the broad range of stakeholder perspectives.

© 2009- Duane Morris LLP. Duane Morris is a registered service mark of Duane Morris LLP.

The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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