Coin Center comments on CFPB proposal to regulate digital currencies

More study is needed before sweeping regulations are promulgated.

Today Coin Center filed a public interest comment in response to the Consumer Financial Protection Bureau’s recent notice of proposed rulemaking relating to prepaid products. While this proposal is focused primarily on prepaid products such as payroll cards, it also notes that some of its requirements may apply to digital currencies. This would potentially subject digital currencies like Bitcoin to regulation under the Electronic Funds Transfer Act. While we do not disagree that meaningful steps can be taken to protect digital currency consumers, we believe that the choice to regulate digital currency firms as providers of prepaid accounts is premature.

We argue that the Bureau has yet to collect the data necessary to properly judge the costs and benefits of such a regulatory plan when it comes to digital currency. The proposal cites its basis as an in-depth study of hundreds of user agreements for prepaid programs of various types. However, none of the studied prepaid programs or companies deal with digital currency. Since the study was apparently unrelated to digital currencies, companies and individuals dealing with currencies like Bitcoin were not reasonably put on notice that this proposed rule making process could affect their business. In our comment we ask that the CFPB offer the digital currency industry the same careful study and measured process that it offered the prepaid industry. The nascent state of the digital currency industry and a lack of widespread consumer adoption affords the Bureau time to conduct such a study.

Without a more diligent study of digital currencies, especially the distinction between centralized and decentralized systems, we suggest that the CFPB should reconsider applying the Electronic Funds Transfer Act across the board. This imprecise method may indeed protect against harms stemming from certain risky businesses, but at the cost of unnecessarily applying heavy compliance costs on honest businesses which must contort to meet regulations not designed with them in mind.

Further, there are certain protective measures which we know are rendered moot by cryptocurrencies like Bitcoin. For example, a business utilizing a centralized digital currency can unilaterally decide to devalue consumer balances by issuing more currency. A cryptocurrency business is not at such liberty; it cannot unilaterally create more tokens because monetary supply is governed by an open, collaborative protocol of which they are only a small part. After a consumer protection study specific to the digital currency industry, the Bureau may find that some combination of mandated technological protections, such as multi-sig wallets or real-time proof of solvency, and existing protections, such as insurance, would better achieve the goal of consumer protection than extending prepaid account rules would.

To read the full comment, click here.