Complaints about crypto are soaring. Is a CFPB crackdown imminent?

As the Consumer Financial Protection Bureau sees an uptick in customer complaints regarding cryptocurrencies, some observers say it is only a matter of time before the CFPB sets its sight on the burgeoning digital-asset industry.

Businesses ranging from credit card providers to banks have pushed bitcoin and other virtual currencies into the mainstream by offering customers more options to buy, sell and make payments with digital assets.

But in turn, complaints to the CFPB related to digital currencies have risen noticeably this year. Complaints that are specifically about the use of a cryptocurrency total 1,433 year to date, up sharply from the 979 complaints submitted for all of 2020 and 488 for 2019.

Many consumers described being unable to access their money held by a cryptocurrency exchange, and complained about the back-and-forth with a company in their attempts to get any response from customer service.

In June, one consumer said in connection with a bitcoin service provider, “My cryptocurrency disappeared from my account.” Another wrote in June, “No assurance that my Bitcoin assets will be returned to my account.”

Though the CFPB has not issued any enforcement actions against cryptocurrency companies or exchanges, the agency tends to mount investigations and issue fines or other penalties against a financial sector after a rise in public complaints. Others in the Biden administration, including Securities and Exchange Commission Chair Gary Gensler, have already shown an interest in taking a tougher stand on the crypto sector.

"Crypto is an area ripe for the CFPB to test the waters,” said Katherine Kirkpatrick, a partner in the special matters and government investigations practice at King & Spalding.

Observers say the CFPB could subject crypto-related firms to the agency's authority to penalize companies accused of "unfair, deceptive, or abusive acts or practices." The federal prohibition against UDAAP is the basis for many CFPB enforcement actions.

"This is a highly volatile space where the CFPB is the primary regulator for consumer compliance, and there is very little consumer protection," said Kirkpatrick.

Earlier this week, Gensler urged Congress to give the SEC more authority to regulate crypto trading to protect investors, referring to the sector as the "Wild West." Last month, Treasury Secretary Janet Yellen called on regulators to develop a response to risks posed by stablecoins.

Just Thursday, The New York Times reported that the administration was considering Cornell University law professor Saule Omarova — who has expressed skepticism about crypto in her academic work — to become the next comptroller of the currency.

At the CFPB, complaints against one particular company are on the rise. Coinbase, the largest crypto exchange with more than 56 million customers, was the subject of 1,009 complaints so far this year, more than triple the total from last year.

A spokeswoman for San Francisco-based Coinbase said the company has increased the number of employees responding to customers.

"We understand how frustrating it is when our customers experience issues such as the inability to access their account or make transactions," Coinbase said in an emailed statement. "Improving our customer support experience remains a top priority. We have recently updated our two-factor authentication and improved our identity verification process to reduce friction for account recovery while maintaining our security standards.”

The CFPB declined to comment. The last time the bureau weighed in about virtual currency was in 2014, when the agency issued a consumer advisory warning consumers about potential issues with bitcoin and other cryptocurrencies such as unclear costs, volatile exchange rates, the threat of hacking and scams, and companies potentially declining to offer help or refunds for lost or stolen funds.

Some experts think the CFPB will take action after Sen. Elizabeth Warren, D-Mass., warned last month of the dangers that cryptocurrencies pose to consumers, including the risks of fraud and money laundering. Warren has called for more oversight by the CFPB, citing the abuse of consumer finance laws by companies promising an easy way for consumers to move money outside the banking system.

Rohit Chopra, who is waiting for Senate confirmation as President Biden's pick to be the next CFPB director, is a consumer advocate and Warren ally. He is currently a Democratic commissioner at the Federal Trade Commission where he called for tighter scrutiny of Libra, the Facebook-led cryptocurrency that debuted in 2019 but is now being renamed by the Diem Association.

How the CFPB would take action against cryptocurrency companies or exchanges has prompted a flurry of questions — not least among cryptocurrency businesses themselves.

Most cryptocurrency exchanges are regulated at the state level through money transmission licenses but must also follow anti-money-laundering rules issued by the Financial Crimes Enforcement Network, or Fincen.

“With regards to crypto, what is it that the CFPB seeks to regulate and how would they protect consumers? That’s the question,” said Alexander Kravets, the U.S. chief executive of CEX.IO, a London-based cryptocurrency exchange.

While the SEC is a primary regulator on behalf of retail investors, and the Commodity Futures Trading Commission has jurisdiction over derivatives and spot markets for cryptocurrencies, the CFPB has jurisdiction over consumer protection.

Many expect the CFPB to flex its muscles through its broad authority to crack down on UDAAP.

Still, some experts think the industry needs to reach more of a critical mass for the CFPB to get involved.

“It's not really a consumer protection issue until there's wide adoption of crypto assets being used in payments,” said Dan Quan, a former head of the CFPB’s innovation office and general partner at Nevcaut Ventures, an Irvine, California, venture fund that invests in fintech startups.

When the industry reaches that point, Quan added, “That’s where the CFPB can be most useful, because it’s no longer people using crypto to speculate."

"If there are bad actors or companies that just stumble in their compliance, the CFPB could take action and it would most likely be a UDAAP” violation, he said.

Regardless of how cryptocurrency is classified, the CFPB can exert its broad authority to aid consumers under the Dodd-Frank Act, many experts said.

"The CFPB might make the argument that exchanges are offering consumers financial products and services," said Kirkpatrick. "Regulators have recognized that this is a space where consumers are confused but eager to participate, [but] there is little precedent on this, and there is little precedent, period, on what the CFPB can or cannot do."

Some cryptocurrency trade groups claim that the industry cannot be subject to regulation because of the nature of blockchain technology. Blockchain transactions are irrevocable if they are sent outside a cryptocurrency exchange.

Some industry participants are concerned about how the CFPB will address the issue of consumer transactions in which funds may be lost.

"You can't bring assets back on a blockchain that you don't control," said Kravets. "People self-direct their own custody and exchange of crypto, so the consumer is responsible for their own actions outside exchanges. But within exchanges there is a level of assistance that is provided."

CEX.IO, which is licensed in 32 states and by Fincen, abides by "know your customer" requirements, provides custody support and transaction monitoring, and can help customers address erroneous transactions, Kravets said.

"The narrative [within the industry] is that a customer can send crypto to an unhosted [digital] wallet and transact in a way not to be captured," said Kirkpatrick.

The CFPB also may take a closer look at the proliferation of credit cards offering crypto rewards.

“Rewards cards are definitely an angle where the CFPB can actually come in and where there may be some communication and marketing issues, and rewards-redemption issues,” Quan said. "But again those issues could happen to any credit card rewards programs."

The CFPB also may examine fintech firms that have partnered with banks to convert and spend cryptocurrencies.

"It's a way to spend crypto easily by converting it to actual dollars on a spendable debit card," said Kravets. "The trouble is that it can be expensive upon conversion, kind of like flying to Europe and changing U.S. dollars for euros at a terrible rate."

There is a recognition generally that more regulation is coming. Last month, Solidus Labs, a New York-based cryptocurrency market surveillance firm, hired former CFPB Director Kathy Kraninger to build a regulatory team as the industry comes under increased scrutiny in Washington.

Meanwhile, Yellen is coordinating the effort to regulate and bring enforcement actions against various parts of the cryptocurrency and blockchain industry including stablecoins, exchanges and potentially the bitcoin spot market.

"There are parts of the industry that don’t understand the peril that is about to hit them," said Dina Ellis Rochkind, an attorney at Paul Hastings who spent nearly 15 years working for the House Financial Services and the Senate Banking committees. “On a positive note, regulation and certainty, will legitimize the industry.”

She said that cryptocurrency trading took off because consumers wanted to invest in startups that typically were offered only through private placements or to accredited investors. But the concept of a decentralized financial system means, ultimately, that it is unclear who is responsible when something goes wrong.

"The reason people like to do business in the U.S., and why we have a robust private sector, is because if something goes wrong we have laws, and people are held accountable,” said Rochkind, a former deputy assistant Treasury secretary in the George W. Bush administration. "At the end of the day, somebody needs to be accountable if something happens, or somebody gets cheated, or technology doesn’t work."

Some players claim they want to ensure that consumers are protected, but within the limits of the technology.

"We are happy to be regulated and provide consumer protections to our customers," said Kravets. "But we want to be sure potential regulations are common sense and take into account the nature of blockchain transactions and proper classification of assets."