Will CFPB Write Rules on Digital Currencies?

WASHINGTON — The Consumer Financial Protection Bureau issued a warning to consumers Monday about the danger of digital currencies, sparking questions about whether the agency could soon seek to write new rules in that area.

The agency said currencies like Bitcoin and Dogecoin can have volatile exchange rates, unclear costs, and are vulnerable to hacking and scams. The agency simultaneously announced it is accepting complaints on virtual currencies, which is often used as the start to an enforcement investigation or research for rulemaking.

Yet Bitcoin advocates said they were not concerned yet about the CFPB writing sweeping new rules, arguing it's not clear they are needed. They pointed to current federal and state registration laws that treat bitcoin exchanges in the same way as other money transmitters.

"I'm not sure the CFPB would go as far as doing any regulation on bitcoin. The states are already doing the consumer protection piece so the CFPB could look for a gap, if there is a gap," said Jerry Brito, a senior research fellow at the Mercatus Center at George Mason University. "And then that depends on what the complaints might say. But this is a maturing industry and it's a very fast industry so a complaint filed today might be irrelevant by the time any new regulations have kicked in."

Several federal regulators such as the Securities and Exchange Commission and the Financial Crimes Enforcement Network have issued guidance to curtail bad actors and require registration of exchanges.

Brito said roughly a dozen states also have state registration requirements that fall in line with existing rules on money transmitters. New York Superintendent Benjamin Lawsky, for example, has proposed regulations to establish registration specifically for bitcoin exchangers.

Some observers said the CFPB is wading in primarily because of criticism by the Government Accountability Office. The GAO released a report in June saying the CFPB's efforts with regard to virtual currencies have been "limited" to date. It recommended that the CFPB work with other agencies or working groups on the issue.

Several observers said the CFPB used similar language in its warning as the earlier GAO report.

"The language and the timing of the CFPB warning was close to the GAO report but this is just a consumer alert. It's not a guidance, it's not a new regulation, it's not a notice of proposed rulemaking," said Marco Santori, the Regulatory Affairs Committee Chair for the Bitcoin Foundation. "And it's the same we've seen from many of the states. The only real difference is a lot of us expected the CFPB to take a more holistic treatment."

In its warning, the CFPB notes that virtual currencies are not backed by any government or central bank, nor are the funds supported by federal deposit insurance. It says digital currencies are still "experimental" and given to rapid price changes.

"In 2013, Bitcoin's price fell as much as 61% in a single day," the CFPB warning says. "In 2014, the one-day price drop has been as big as 80%."

It also says that although Bitcoin kiosks may appear like ATMS, they "are not ATMs at all."

"Unlike ATMs that you may associate with your checking and savings accounts, Bitcoin kiosks do not connect to your bank and may lack many of the safeguards you would expect," the CFPB says. "They may also charge high transaction fees — media reports describe transaction fees as high as 7% and exchange rates $50 over rates you could get elsewhere."

But Bitcoin supporters said the CFPB did not recognize any benefit of virtual currencies.

"Bitcoin was created as tool to empower consumers," Santori said. But "all the CFPB released is a long list of risks … Bitcoin is a boon for consumers and it really is one of greatest tools in history for promoting consumer financing."

Advocates said that exchanging such virtual currency uses far less personal information since transactions are typically done through a digital "private key" code — though the CFPB cautions about that as well. The costs to transfer bitcoin can sometimes be cheaper because a third party does not always have to be involved like a typical money remittance provider, according to supporters.

The CFPB's warning "is a very fair assessment. These risks do exist … at same time, it's not the CFPB's job to highlight the benefits," Brito said. "And there are substantial benefits on the other side of these risks."

Some also critiqued the CFPB's data. The price drop the agency used is a one-day snapshot as compared to huge gains in bitcoin's value over the past year. The price of a bitcoin on the CoinDesk USD Bitcoin Price Index has remained slightly below $600 for nearly three weeks but that's far higher than the $95.08 price tag on a bitcoin exactly one year ago. Bitcoin dropped off by roughly $16 on Monday following the CFPB's announcement to $572.55 in the evening, compared to the day's open of $589.45.

In addition to mentioning Bitcoin, the CFPB also mentions XRP and Dogecoin as examples of digital currency. The latter began as a joke, but has evolved to be more significant.

Many observers say they expect other regulators to issue warnings to the public but they don't expect it to stymie the growth or the evolution of digital currencies. Most of the Bitcoin owners to date have been technologically savvy traders who already understand the risks and benefits.

Bitcoin advocates say it will eventually spread to the general public, particularly those needing alternative payment sources like the underbanked and unbanked.

"In the future, not only will we use them [bitcoins] as a payment source but for other things like notary services and using it as way to create commodities," Brito said. "And that is going to involve other regulators in the future."