New CFPB Rule May Extend Consumer Protections to Crypto

The US Consumer Financial Protection Bureau (CFPB) has proposed a proposal that could redefine consumer protections in the cryptocurrency sector.

The regulation aims to hold crypto service providers accountable for compensating users who have lost money through theft or fraud.

The US regulator plans to expand consumer protection in Crypto

On January 10, the CFPB announced proposed legislation that would expand the scope of the Electronic Funds Transfer Act (EFTA) to include crypto accounts using “distributed payment methods.” This essentially equates crypto accounts to traditional bank accounts, subjecting them to the same error and fraud protection standards.

The Bureau also proposed redefining the term “funds” to include assets in excess of US dollars. This broad definition covers assets such as cryptocurrencies, as a currency or measure of value.

Additionally, wallet providers are required to disclose important consumer rights, including liability for unauthorized transactions, transaction limits, applicable fees, and error resolution procedures. Regular disclosures and notifications regarding changes to terms will also be mandatory.

If implemented, the regulation could provide stronger protections for consumers buying in stablecoins and other digital assets. Public comments on the proposal are open until March 31, after which the CFPB will decide on next steps.

Crypto experts highlight the risks

Despite its potential to address rising cyber threats — crypto hacks alone are expected to cause $3 billion in losses by 2024 — the law has drawn criticism. Critics argue that the CFPB's broad interpretations and lack of consultation with key crypto stakeholders could hamper its implementation.

Jai Massari, chief legal officer at Lightspark, emphasized that the law leaves many questions unanswered. The language does not seem to cover non-cash wallets, which creates uncertainty for developers and users.

“There are many questions raised by the proposal and the RFI, but this proposed guidance does not, on plain reading, lead to the conclusion that non-custodial wallets (or software DV creators) would be subject to Reg E,” Massai wrote.

Legal expert Drew Hinkes echoed these concerns, suggesting that applying the EFTA framework to cryptocurrency transactions could lead to complications. It called for the applicability of certain requirements, such as temporary credits, and called for a narrower focus on certain parties and types of assets to improve transparency.

Meanwhile, Bill Hughes of Consensus took a more critical stance, calling the CFPB's proposal an overreach. He warned that this approach to control may continue unless US leadership is corrected in the future.

“Under the banner of consumer protection (who can argue with consumer protection, after all?) the collaboration that is crypto won't stop until someone stops it. And that someone is the next president of the United States. So add this to the list of “law by decree” problems that need fixing.