New York Virtual Currency Proposal Could Capture Bank Products, Card Rewards Programs
On July 17, the New York Department of Financial Services (NYDFS) proposed a rule intended to govern the virtual currency marketplace. The proposed rule is extremely broad and as currently drafted would appear to capture products provided by traditional brick and mortar banks and other regulated financial institutions. For example, as proposed, the rule could regulate:
Reward programs, "thank you" offers, or digital coupons that offer cash back or statement credits;
Generated numbers that access cash;
Prepaid access and other cards that will allow customers to receive cash, including those customarily exempt such as government funded transfers;
P2P transfers; and
Wallet providers where the customer can access cash.
If left unaddressed, these apparent unintended consequences could create a confusing regulatory environment for certain bank and card products. It is also noteworthy that the rule does not provide any customary exclusions for chartered entities, raising substantial preemption questions.
Businesses engaging in activities covered by the proposed rule would be required to apply for a license from the NYDFS within 45 days of the effective date of the regulation. The proposed rule also sets out comprehensive compliance obligations involving consumer protection, cybersecurity, anti-money laundering, and anti-fraud, and the rule would subject licensed institutions to examination by the NYDFS. Failure to obtain a license could result in disciplinary action by the NYDFS.
The comment period on the proposed rule ends on September 6, 2014. Please contact us if you would like assistance preparing formal comments.
CFPB Announces Two Actions Related To Virtual Currencies
Yesterday afternoon, the Consumer Financial Protection Bureau (the CFPB or Bureau) issued a "consumer advisory" concerning virtual currency and also announced that it would begin accepting consumer complaints about virtual currency or virtual currency companies. These actions are the consumer agency’s first foray into virtual currencies, and they follow a recent GAO report that recommended the CFPB play a larger role in the development of federal virtual currency policy.
The advisory describes virtual currencies, briefly notes their potential for innovation, and cautions consumers about the numerous and significant risks the CFPB believes virtual currencies present for consumers. Specifically, the CFPB cautions virtual currency consumers that there are risks related to hackers, fewer consumer protections, costs, and scams. The advisory elaborates on the risks for each stage of a virtual currency transaction: purchasing, storing, or transacting in virtual currencies. For example:
Purchasing: Warns consumers purchasing virtual currencies to beware of cost fluctuations and potential scams.
Storage: Expresses concerns about data security risks and the lack of federal insurance for virtual currencies.
Transactions: Advises consumers transacting in virtual currencies to read their agreement with their wallet provider and be mindful of the risks of linking their digital wallet account to their bank account or payment card.
The Bureau announced that it is working on a new form for virtual currency complaints, but in the meantime will accept such complaints using its money transfer complaints form.
Virtual currency complaints will be subject to the CFPB’s standard complaint process. As described in the CFPB’s most recent consumer complaint report, once a complaint is submitted, the CFPB sends the complaint to the appropriate company and works with the company to get a response within 15 calendar days. Each complaint is published in a public database after the company responds to the complaint or after the company has had the complaint for 15 days, whichever comes first. If a company can demonstrate within the 15-day period that it has been wrongly identified, no data for that complaint will be posted unless and until the correct company is identified. The CFPB states that if it receives a complaint about an issue outside its jurisdiction, the Bureau will forward the complaint to the appropriate federal or state regulator.
Jurisdictional issues notwithstanding, the Bureau promises to use all virtual currency complaints it receives to better understand the virtual currency market and its effect on consumers. The CFPB also asserts that it will use complaints to help enforce federal consumer financial laws and, if appropriate, take consumer protection policy steps. The Bureau has demonstrated through its examination and enforcement activity in other areas that consumer complaints play a significant role in the Bureau’s risk-based approach to supervision and enforcement. Moreover, the CFPB recently proposed to publish consumer complaint narratives with other complaint data already made public, noting in its proposal that by increasing consumer complaint volume, publication of narratives would benefit “the many Bureau functions that rely, in part, on complaint data to perform their respective missions including the Offices of Supervision, Enforcement, and Fair Lending, Consumer Education and Engagement, and Research, Markets, and Rulemaking."