Federal consumer protection watchdog stakes out crypto turf in SEC shadow

The U.S. Consumer Financial Protection Bureau, which is tasked with overseeing a hodgepodge of financial service providers including payment companies, appears to be taking a fresh look at crypto regulation despite earlier inertia.   

“Crypto is now becoming a vehicle of choice," agency director Rohit Chopra told the progressive think tank Americans for Financial Reform last month, noting the potential for fraud that could occur in the sector. "I really want to be sure that we are thinking about digital currencies in the context of real-time payments."

In Congressional testimony and elsewhere, Chopra has highlighted the prospect of payment stablecoins as a CFPB domain, although he's always careful not to push the bounds of the agency's authority in the crypto universe and avoids treading on the toes of the older, larger Securities and Exchange Commission.

Just weeks after those comments at AFR, Chopra answered "no" when asked by Rep. Bill Huizenga, R-Mich., if the agency was planning more crypto enforcement after a November analysis of consumer complaints about crypto scams drew attention from lawmakers. A spokesperson for the CFPB declined to comment on the November analysis and any change in enforcements against crypto companies. 

Last January, the agency hired Alexis Goldstein, a progressive policy advocate who’d quickly made a name for herself testifying before Congress in opposition to the crypto industry. The industry at the time reacted with alarm, but little has happened aside from a July request for better crypto analytics software after scrapping a contract with Elliptic. A year later, the CFPB seems to be moving in. 

Nexo Case

A court order the CFPB quietly released on Dec. 1 rejected crypto lender Nexo’s petition to stop an investigation the agency was carrying out, after the company had argued that an ongoing SEC investigation meant that the CFPB had no standing. In no uncertain terms, the court found that “the Bureau has the authority to investigate whether Nexo Financial or others associated with it may have violated federal consumer financial law.”

While Europe-based Nexo's fate remains uncertain after recent police raids on its offices in Sofia, the petition, and its rejection, showed the CFPB asserting a bigger place at the table. Kathy Kraninger, Chopra’s predecessor at the agency under former U.S. President Donald Trump, called Nexo an example of “the CFPB exploring the bounds of its authorities.”  

Kraninger, who now works for crypto market surveillance company Solidus Labs, noted “the conundrum that the crypto industry finds itself in, generally.”  

“There is confusion around which regulators have asserted jurisdiction over these products, but the flip side of that is exactly the point that the CFPB made in response — which is the conundrum — which is that you can’t have it both ways,” she explained.  

Particularly, Nexo's argument was that the CFPB couldn't investigate their product because the SEC was already investigating. Yet Nexo also avoided saying their Earn accounts were securities, leaving the door open to reject the SEC’s jurisdiction as well.  

Key applications

“The CFPB is asserting power over crypto solutions that bring financial products to consumers,” investment bank Cowen’s Washington team said in a recent newsletter.

Even as the CFPB avoids treading on SEC territory, it's still trying to find a foothold. The most pressing application of its authority in crypto is Regulation E, which the Nexo decision namechecks repeatedly. The measure gives the bureau authority to oversee non-investment electronic fund transfers, monitoring for failures that get in the way of consumers moving their money around. 

Stablecoins, if they become a widely used means of payment, are also clearly top of mind for Chopra, as he has said repeatedly, making particular reference to a Libra-like token that could spread quickly through an existing network. Other potential areas for the CFPB in crypto are applications of the Truth in Lending Act and Truth in Saving Act. 

While Chopra has said that crypto is not a product his agency regulates, “certain electronic consumer transactions are.” It’s a critical carve-out for non-investment use of crypto that, as the CFPB is setting it up, won’t raise the hackles of markets regulators.

“The SEC has a lot of primacy there,” said Mark Hays, a senior fellow in fintech at AFR. He noted that the CFPB had been “good team players” and contrasted the bureau’s respect of the SEC’s lines with the Commodity Futures Trading Commission, which has pushed for a distinct regulatory regime for at least some crypto exchanges.