GAO: Virtual Currencies—Emerging Regulatory, Law Enforcement and Consumer Protection Challenges

by Manatt, Phelps & Phillips, LLP
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The Government Accountability Office (GAO) released on June 26 its long-awaited report on virtual currencies undertaken at the request of Senator Tom Carper, chairman of the Senate Committee on Homeland Security & Governmental Affairs. Sen. Carper had asked the GAO to review the potential policy issues surrounding virtual currencies and the status of federal agency collaboration to address such issues.

Providing a good primer on the general legal framework within which virtual currencies operate today, the report addresses the responsibilities of each agency with respect to virtual currencies and the challenges they present for the agency, as well as the actions the agencies have taken in response to virtual currencies and how they are collaborating with other agencies.

Concluding that virtual currencies are technological innovations that present potential risks and benefits for consumers, the report recommends that the Consumer Financial Protection Bureau (CFPB) become more engaged in interagency working groups on the subject. The CFPB, which had an opportunity to comment on the report before its issuance, agreed with the recommendation.

Almost one-quarter of the 56-page report is spent discussing bitcoin and other crypto currencies. The report notes the regulatory, law enforcement and consumer protection challenges presented by such virtual currencies. In particular, it cites potentially greater anonymity of virtual currencies in the absence of a central administrator and their cross-jurisdictional nature as a result of operating on the Internet. Virtual currencies implicate multiple federal agencies, and as a result, addressing these risks will require interagency collaboration and effort. The risks for consumers include 1) lack of bank involvement, and thus none of specific consumer protections such as federal deposit insurance that would be available if a bank were involved; 2) stated limits on financial recourse if a consumer has losses resulting from unauthorized access to the virtual currency account; and 3) volatile prices. On the other hand, virtual currencies offer 1) lower cost, faster transactions because of the lack of an intermediary; 2) financial privacy; and 3) access to populations without access to traditional financial services.

Sen. Carper welcomed the report as “helpful in that it described what the federal government and law enforcement have done and continue to do.” However, Sen. Carper cautioned that the report also raised questions, particularly for the CFPB. Sen. Carper stressed that “all sectors—law enforcement, industry, relevant regulators, and consumer protection agencies—must come to the table and engage in meaningful dialogue to provide clear rules of the road for entrepreneurs, investors, and consumers alike.”

Why it matters: We expect as a result of this report the CFPB will take a much more active role in protecting consumers involved with virtual currencies. In fact, even before the release of the report, the CFPB had already indicated that it was stepping up its efforts to provide greater guidance in this area.

To read the GAO report on virtual currencies, click here.

To read the Senate Committee on Homeland Security & Governmental Affair’s article on the report, click here.

 

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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