Patrick McHenry, the Republican Chair of the House Financial Services Committee, and two other Republican Committee members have sent a letter to Director Chopra regarding the CFPB’s proposed rule to supervise nonbank companies that qualify as larger participants in a market for “general-use digital consumer payment applications.” 

The proposal is based on the CFPB’s authority to supervise nonbank entities considered to be “a larger participant of a market for other consumer financial products or services.”  It would cover providers of consumer financial products and services that are commonly referred to as “digital wallets,” “payment apps,” “funds transfer apps,”  and “person-to-person or P2P payment apps.”  Because the Consumer Financial Protection Act allows the CFPB to supervise all service providers to entities that it supervises, the proposal would also allow the CFPB to supervise all service providers to “larger participant” nonbank providers of digital wallets and payment apps, regardless of the service provider’s size.

To be a participant in the relevant market, a company must be “providing a general-use digital consumer application,” which is defined to mean “providing a covered payment functionality through a digital application for consumers’ general use in making consumer payment transaction(s) as defined in [the rule].”  A “covered payment functionality” is (1) a “funds transfer functionality,” or (2) a “wallet functionality.”  A “consumer payment transaction” is defined as “the transfer of funds by or on behalf of a consumer physically located in a State to another person primarily for personal, family, or household purposes.”  “Funds” is not limited to fiat currency or legal tender and includes digital assets, such as cryptocurrency.

The comment period on the proposal closed on January 8, 2024.  In their letter, the lawmakers “strongly urge” the CFPB to reopen the comment period for an additional 60 days.  According to the lawmakers, before moving forward to finalize the proposal, the CFPB should consider the following issues:

• The proposal does not adequately justify the need for the CFPB to supervise these nonbank entities and fails to analyze the costs, the impact on competition, and “inevitably how the proposal hurts consumers.” The proposal does not provide any evidence of non-compliance with federal consumer financial laws or explain how the proposal would address such failures.  The CFPB’s disregard of such considerations allows it “to wield a concerning degree of power when issuing a larger participant rule.” The proposal would allow the CFPB to supervise a nonbank’s activities outside of its general-use digital payment app.  Such supervision “is unwarranted and an inappropriate demonstration of unchecked authority.”  Before finalizing the rule, the CFPB should provide justification for the rule that includes a more detailed analysis of the proposed rule’s scope and its impact.
• The proposal leaves many unanswered questions with respect to how the CFPB intends to conduct oversight of service providers.
• The proposal is unclear about its coverage of specific entities within the digital asset ecosystem.  It explicitly states that fiat-to-crypto and crypto-to-crypto transactions conducted on an exchange would not be covered but is unclear as to whether this exclusion would exempt digital asset exchanges entirely or only where they offer services limited to the conversion of fiat-to-crypto and crypto-to-crypto transactions.  If the exclusion does not entirely exempt digital asset exchanges, such exchanges may be dissuaded from expanding their services to allow for peer-to-peer transactions through wallets hosted on the platform.
• The proposal’s definition of “wallet functionality,” taken in conjunction with the definition of “funds,” raises questions about which entities would be covered by the proposal.  Peer-to-peer transactions through self-hosted wallets is a core component for the digital asset ecosystem because it eliminates third party risk.  The proposal would introduce regulatory risk by capturing certain digital asset providers who themselves do not maintain an ongoing relationship with consumers.  This coverage “ventures far beyond Dodd-Frank’s intended scope” and the CFPB should refrain from pursuing such a broad definition.

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