New Frontiers: CFPB Proposes Extending Consumer Protections to Other Digital Payment Mechanisms
Highlights
- A proposed interpretive rule by the Consumer Financial Protection Bureau (CFPB) seeks to broaden the scope of the Electronic Fund Transfer Act (EFTA) and Regulation E to cover emerging digital payment mechanisms, including cryptocurrencies, stablecoins and digital reward points, requiring new compliance obligations for previously unregulated businesses.
- With comments on the proposal due by March 31, 2025, the final decision on the rule's implementation will fall to the next CFPB director, potentially influencing the regulatory stance on digital assets under the Trump Administration's expected crypto-friendly approach.
- Businesses newly categorized as financial institutions under the proposal must align with Regulation E requirements, including error resolution, consumer disclosures and transaction reporting.
In the waning days of the Biden Administration, the Consumer Financial Protection Bureau (CFPB) on Jan. 10, 2025, issued a proposed interpretive rule1 that would provide a framework for determining when the Electronic Fund Transfer Act (EFTA) and its implementing regulation, Regulation E, would apply to emerging digital payment mechanisms. These mechanisms include certain cryptocurrencies, stablecoins, video game currencies and rewards points. This proposed interpretive rule would extend the scope of EFTA and Regulation E to businesses that were previously not subject to their requirements.
This development does not come as a surprise, as CFPB Director Rohit Chopra has previously signaled during his tenure that the CFPB was exploring providing additional guidance regarding the applicability of EFTA with respect to private digital dollars and other virtual currencies for consumer and retail use. This Holland & Knight alert aims to provide an overview of the proposed interpretive rule and its potential implications for affected businesses.
Summary of the Interpretive Rule
Expanded Definition
The proposed interpretive rule would broaden the scope of entities considered as financial institutions. Traditionally, this term has included banks, credit unions and other entities directly involved in financial transactions. The proposed interpretive rule, if finalized, would now encompass a wider range of businesses that facilitate electronic fund transfers (EFTs).
EFTA and Regulation E apply to an EFT that authorizes a "financial institution" to debit or credit a consumer's account. An EFT is defined as any transfer of "funds" that is initiated through an electronic terminal, telephone, computer or magnetic tape for the purpose of ordering, instructing, or authorizing a financial institution to debit or credit a consumer's account.2
Exception to "EFT" Definition
Historically, Regulation E and EFTA have provided a securities and commodities exception to the definition of EFT. However, this proposed interpretive rule seeks to narrow these protections. Generally, the exceptions include any transfer of funds where the primary purpose is to purchase or sell a security or commodity, provided one of the following is present: 1) the security or commodity is regulated by the U.S. Securities and Exchange Commission (SEC); 2) the security or commodity is regulated by the Commodity Futures Trading Commission (CFTC), or 3) the security or commodity is purchased or sold through a broker-dealer regulated by the SEC or through a futures commissions merchant regulated by the CFTC.
In the CFPB's view, any transfer of digital assets for another consumer purchase – even from an account generally intended for securities and investments – could be outside of the exception. The proposed interpretive rule states that, "EFTA … could apply if a stock, bond, or other form of funds in an investment account—including funds and accounts also regulated by the SEC or CFTC—is used to purchase goods or services from a retailer." Since the application of the securities laws to cryptocurrencies is an issue subject to continued debate, the scope of this Regulation E exception remains uncertain and could be narrowed if the CFPB's view holds.
Funds
The proposed interpretive rule aims to provide guidance on what constitutes "funds." The term is not generally defined by EFTA or Regulation E, and the CFPB opted not to propose to add a "funds" definition to Regulation E in the context of a formal rulemaking process. However, the term has been interpreted to cover a wide range of assets, beyond those held in a traditional financial institution. The proposed interpretive rule would not limit the term to fiat currency such as U.S. dollars. Rather, the term also would encompass assets that act or are used like money, in the way that they are accepted as a medium of exchange, a measure of value or a means of payment.
Importantly, under this interpretation, the term "funds" would include fungible assets that either operate as a medium of exchange or as a means of paying for goods or services. For example, stablecoins – a type of cryptocurrency – would be included, but the CFPB does not indicate whether any other specific types of cryptocurrencies, such as Bitcoin or Ethereum, would fall within scope. However, whether an asset is a "fund" would be a fact-specific determination. For example, nonfungible tokens (NFTs) would not fall within the definition because they cannot be used to make payments or cannot be readily exchanged for fiat currency.
Further, the proposed interpretive rule would provide that an asset's fluctuation in value would not exempt it from the definition. The proposed interpretive rule cites several cases interpreting "funds" in the context of federal money transmitter and money laundering statutes. The courts held that the term "funds" is not limited to fiat currency and encompasses other types of assets and currencies such as Bitcoin.
In Rider v. Uphold HQ Inc., the U.S. District Court for the Southern District of New York addressed the issue of whether cryptocurrencies constitute "funds" under the EFTA.3 The court reasoned that because EFTA does not define "funds," the court must give the term its ordinary meaning. Black's Law Dictionary defines "funds" as "[a] sum of money or other liquid assets established for a specific purpose." Under its ordinary meaning, the court determined that "cryptocurrency" as a digital form of liquid, monetary asset constituted "funds" under EFTA. Given that decision was issued in February 2023, it remains unclear why the CFPB took so much time to issue this proposed interpretive rule since the positions are very much parallel, and the CFPB seemingly could have acted more quickly to adopt this position given the inertia provided by the court decision.
Account and Other Consumer Asset Account
The CFPB acknowledges that the proposed interpretive rule's applicability to new payment mechanisms would likely hinge on the definition of "account." EFTA and Regulation E generally define "account" to mean: "a demand deposit (checking), savings, or other consumer asset account (other than an occasional or incidental credit balance in a credit plan) held directly or indirectly by a financial institution and established primarily for personal, family, or household purposes."4
Under the CFPB's proposed interpretation, several payment mechanisms may constitute an "other consumer asset account." These accounts include prepaid accounts and other asset accounts established primarily for a consumer's individual, family or household use into which funds can be deposited by the consumer or on their behalf and which have certain features of deposit or savings accounts. Depending on the situation, the following could be considered an "account" under the proposed interpretive rule:
- video game account used to purchase virtual items from multiple game developers or players5
- virtual currency wallet that can be used to buy goods and services or make person-to-person transfers
- credit card reward points account that allows consumers to buy points that can be used to purchase goods from multiple merchants
The CFPB is soliciting comments regarding the proposed interpretive rule. Comments must be received by March 31, 2025.
Practical Implications
If finalized, the proposed interpretive rule would have several practical implications for new and emerging payment mechanisms now qualifying as financial institutions. Most notably, businesses providing such mechanisms – just as those already regulated by Regulation E – would be required to:
- comply with investigation and error resolution obligations under Regulation E
- provide initial disclosure of the terms and conditions of EFT services before the first EFT is made or at the time the consumer contracts for an EFT service
- provide regular, periodic statements and change-in-terms notices
- comply with unauthorized transfer requirements.
Error Resolution Compliance
Compliance with error resolution obligations requires a financial institution to take certain steps after receiving an oral or written notice of an error from a consumer. In such a situation, the financial institution must do all of the following:
- promptly investigate the oral or written allegation of error
- complete its investigation within the time limits specified in Regulation E
- report the results of its investigation within three business days after completing its investigation
- correct the error within one business day after determining that an error has occurred
What Constitutes an Error Under EFTA and Regulation E?
An error under EFTA and Regulation E includes:
- an unauthorized EFT
- an incorrect EFT to or from the consumer's account
- the omission from a periodic statement of an EFT to or from the consumer's account
- a computational or bookkeeping error made by the financial institution relating to an EFT
- the consumer's receipt of an incorrect amount of money from an electronic terminal
- an EFT not identified in accordance with the requirements of 12 C.F.R. Section 1005.9 or 1005.10(a)
- a consumer's request for any documentation required by 12 C.F.R. Section 1005.9 or 1005.10(a), or for additional information or clarification concerning an EFT
The term "error" does not include:
- a routine inquiry about the consumer's account balance
- a request for information for tax or other recordkeeping purposes
- a request for duplicate copies of documentation
Businesses that would be classified as financial institutions under the proposed interpretive rule would need to comply with Regulation E's requirements, including consumer protection measures, error resolution procedures and disclosure obligations. Thus, it is crucial for such businesses to assess their operations and ensure compliance with this potential new regulatory framework to avoid potential legal and financial risks.
Impact on Businesses
Scope of Applicability
Businesses that previously operated outside the purview of Regulation E may now need to assess their operations to determine compliance requirements. This includes entities involved in electronic payments, remittances and other financial services that facilitate electronic fund transfers, such as digital payment mechanisms, including some cryptocurrencies, stablecoins, video game currencies and rewards points.
Compliance Challenges
Newly covered businesses may face challenges in aligning their operations with these proposed changes to Regulation E's requirements. This includes ensuring proper disclosure of terms, error resolution procedures and consumer rights in electronic transactions.
Operational Impacts
The proposed interpretive rule if finalized would likely necessitate certain changes in business processes, including updates to consumer agreements, staff training and the implementation of new compliance monitoring systems.
Impact of New Administration
Although this development is the CFPB's most direct attempt to apply its existing authorities to certain digital assets to date, it is unexpected in a few ways. Given that comments on the proposal are not due until March 31, the CFPB is leaving the outcome to its next acting director or director.
The Trump Administration is widely viewed as likely to take a more crypto-friendly approach to the regulatory landscape, signaling it may not support finalizing this particular interpretation. It is also likely to oppose much of the CFPB's non-rulemaking guidance such as this that have been hallmarks of Director Rohit Chopra's tenure. However, some courts have already issued decisions on this issue, as discussed above, and the CFPB may wish to create a brighter line regarding the application of EFTA.
In November 2024, the CFPB issued its final rule6 to define larger participants of a market for general-use digital consumer payment applications and excluded certain digital asset transactions from coverage by not including them in the definition of "consumer payment transaction." This by itself was noteworthy because it was a significant departure from the proposed rule issued in November 2023 and would have marked the first time the CFPB had taken a formal step toward regulation of certain digital asset products or services – including crypto-assets, sometimes referred to as "virtual currency" – by asserting jurisdiction over at least some of them.
Instead, the CFPB decided to take its "first step" in regulating digital assets through this proposed interpretive rule. Even if the proposed rule is not finalized, digital asset regulation will continue to be scrutinized and receive attention. Companies should take heed and know that additional regulatory developments are anticipated.
How We Can Help
Holland & Knight's Consumer Protection Defense and Compliance Team includes a robust CFPB practice, with experienced attorneys who are recognized thought leaders in consumer protection and financial services issues, covering all industries and topics. From representing dozens of companies and individuals in federal and state investigations to compliance and risk management counseling, the firm's practice includes regulatory, compliance, litigation, investigation and transactional work.
Holland & Knight's Financial Services Regulatory Team provides compliance and regulatory advice regarding state and federal financial services issues to banks non-bank financial services companies, credit card issuers, FinTech industry members and money transmitters, among others.
For more information or questions about the specific impact that the proposed interpretive rule may have on your company, contact Eamonn Moran or another member of Holland & Knight's Consumer Protection Defense and Compliance Team.
Notes
1 90 FR 3723.
2 90 FR 3723.
3 Rider v. Uphold HQ Inc., 657 F. Supp. 3d 491, 498 (S.D.N.Y. 2023).
4 12 CFR 1005.2(b)(1); see also 15 U.S.C. § 1693a(2).
5 The CFPB previously issued a report and a consumer advisory in 2024 identifying financial risks to consumers in the context of video gaming marketplaces. According to the CFPB, the growth in banking options and payments in gaming leaves consumers' assets and personal data at risk. See Banking in video games and virtual worlds; Consumer Advisory: Video games are targeting your children to get into your wallet. In conjunction with the release of this proposed interpretive rule on Jan. 10, 2025, the CFPB invited gamers, and the broader public, to provide comments and share their experiences with video game currencies and gaming accounts. See LFG (Looking for gamers): CFPB wants to hear about your video game loot.
6 89 FR 99582.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.