Rohit Chopra, the director of the Consumer Financial Protection Bureau, has concerns about peer-to-peer payment platforms such as PayPal, Venmo and Cash App.
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"We're also really interested in fraud and the safety and security of [customer] funds," he said during the event hosted by the Washington Post. "I have argued that we may need to think, when it comes to digital payments and currency, of looking at an old provision of law that was passed in 2010 that would allow the regulators to designate certain payment systems as potentially systemic, which would allow us to make sure they are safe and sound and protecting consumers."
The "old provision" Chopra referenced was the Dodd-Frank Act, which created Financial Stability Oversight Council, or FSOC, and gave it the authority to deem certain nonbank financial institutions systemically important. Such a designation subjects firms to enhanced regulatory oversight by the Federal Reserve.
In a statement provided to American Banker on Thursday, a CFPB spokesperson said Chopra's comments were related to Title VIII of Dodd-Frank, which covers designations for financial market utilities as well as broad categories of activities related to payments, clearing and settlements.
"Director Chopra was referring to the designation authority provided under Title VIII of the Dodd-Frank Act, which allows the FSOC to designate payment, clearing, and settlement activities that it determines are, or are likely to become, systemically important," the spokesperson said in a written statement. "Such a designation would enable regulators to apply enhanced safeguards to any firms engaging in the designated activity. "
While Chopra, as director of the CFPB, sits on the FSOC, the council's decisions are managed by Treasury Secretary Janet Yellen and passed by majority vote. Even so, Chopra's position could signal a new initiative by the interagency council.
The Treasury Department did not respond to a request for comment Wednesday.
Chopra is not the only one to suggest peer-to-peer payment apps are potential financial stability risks. Others in bank regulation, academia and public advocacy say the systems are engaging in bank-like activity and therefore should be subject to bank-like oversight.
"The so-called shadow banking system, of which these companies are a part, is bigger than the banking system, but there's very little transparency and even less regulation," said Dennis Kelleher, head of the consumer advocacy group Better Markets, noting that Chopra is right to gather more information about payment platforms to see whether they rise to the level of systemically important.
Others are skeptical that Chopra's probing of payment platforms will lead to them being classified as systemic threats.
"It is exceedingly difficult to envision these platforms being designated as systemically important," Isaac Boltanksy, director of policy research at the brokerage BTIG, said. "The FSOC has exhibited a sense of detached apathy during the Biden administration. There was a belief that the FSOC would be reinvigorated, and its powers put to the test, potentially in stablecoin markets or even certain corners of the private equity industry. Instead, we have seen an entity that appears to be tasked with chronicling financial regulatory developments rather than influencing them."
By definition, a firm can be designated a systemically important financial institution, or SIFI, if its distress or failure would have a material impact on the broader financial system. But determining whether a company meets this criteria is difficult. Only
Eight entities have been deemed systemically important financial market utilities under Title VIII, but the provision has never been used to classify an entire category of activities, as would be the case for peer-to-peer payments.
Rule changes imposed during the Trump administration, which aimed to create a narrower path for designating SIFIs, made the process harder still, said Todd Phillips, an independent consultant and former lawyer for the Federal Deposit Insurance Corp.
Phillips said designating any of the peer-to-peer platforms Chopra cited would be difficult to do without loosening the Trump-era standards. That means action on this front would have to wait until a potential second term for President Joe Biden, at the earliest. But, Phillips noted, a SIFI label is not the only way to keep these payment firms in check.
"These firms already plausibly violate the law," he said. "There are provisions of banking laws that say firms cannot take deposits unless they are a chartered bank. An argument could be made that these companies are taking deposits without being chartered."
Venmo, Paypal, Cash App, Apple and Google did not respond to a request for comment on Wednesday.
During his remarks, Chopra said many consumers have taken to using these platforms like de facto banks by keeping large balances in their digital wallets rather than transferring them to bank accounts.
"Instead of just moving money from place to place, a lot of customers have balances. People can look at their app, their PayPal or Venmo or Cash App balance, and many people think of this like a bank account. 'It's a place I can store funds,'" Chopra said. "But, the reality is it's not like a traditional bank account, and there are certain circumstances where those balances may not be fully insured."
Chopra said he encourages consumers not to maintain balances in their payment apps and instead move funds to traditional bank accounts promptly after receiving them.
In a note published Wednesday, Jaret Seiberg, an analyst for the TD Cowen Washington Research Group, said he views Chopra's focus on digital wallets as a continuation of the Securities and Exchange Commission's efforts around cryptocurrencies, in that both aim to direct consumer funds away from risky platforms and toward insured deposits.
"Our view remains that any government crackdown here will benefit the banks and the rollout of FedNow instant payments, which will offer consumers the same instant settlement that they experience with nonbank and crypto payment options but provide them with FDIC protection for their funds," Seiberg wrote.
Kelleher said Chopra's efforts to gather more information on payment platforms is a step in the right direction. But, he said, it also demonstrates how little regulators currently know about such non-bank firms.
"It's a condemnation of regulators that, today, they don't have the information to know what is systemic in the shadow banking system," Kelleher said. "It's laughable that today, according to FSOC, there's not one single systemically significant non-bank in the United States."
