The CFPB's Prepaid Proposal Could Rattle Bitcoin Companies

Bitcoin wallet providers have had a touchy relationship with prepaid cards. But whether or not these companies care about plastic, they should care about how the Consumer Financial Protection Bureau's prepaid proposal affects them.

While most of the agency's 870-page document addresses long-standing prepaid card problems, such as fee disclosure, fee caps and consumers costs for lost or stolen cards, it also extends regulations into the mobile, peer-to-peer, payroll and government benefits spheres. Many Bitcoin wallets could be considered prepaid accounts even if they operate purely as mobile apps.

"Products that have prepaid-like features on them — in other words they can store funds — looks like they would be included under the rules, regardless of the access method," said Madeline K. Aufseeser, senior analyst with Boston-based Aite Group. "The way I see the rules is that they are trying to level the playing field across industry and non-industry players."

Bitcoin wallet apps enable the digital currency's users to check balances and transfer funds. Though there have been some efforts to link these wallets to plastic cards to enable their use at the point of sale, for the most part Bitcoin payments are purely digital.

If the CFPB intends for its prepaid rules to apply to Bitcoin, it would not be the first time the agency has shown an interest in virtual currency, said Michael Terpin, co-founder and chief marketing officer for Santa Monica, Calif.-based BitAngels, an organization that steers investors toward virtual currency companies.

In August, the agency warned virtual currency providers that it would keep an eye on how the various products ultimately affect consumers. Essentially, the agency was saying it stood ready to regulate the industry as needed.

"The bureau came out with a long list of things that could go wrong with Bitcoin at that time," Terpin said. "The bureau basically gives warnings to the general public, but they said Bitcoin is used in crimes, but so are dollar bills … and they haven't outlawed them yet."

Considering how many other agencies have threatened to regulate Bitcoin and other digital currencies, the CFPB "is way down on the list" of concerns of those who support alternative currencies, Terpin said.

Bitcoin supporters have kept a close eye on state regulations, particularly New York's effort to create a BitLicense. Many states regulate Bitcoin companies as money transmitters, requiring them to get the same licensing as mainstream payment companies.

Some states, such as New Mexico, don't require money transmitter licensing, making them appealing to digital currency providers, Terpin said.

The CFPB is in the midst of a 90-day feedback period as it considers its proposed rules. It may choose to adopt all or part of its proposal.

"If the proposal were ultimately enacted 'as is,' consumers of this new broad class of products would be afforded considerably more protections than what they receive today," said Jonathan Kolodziej, an attorney in the Financial Services Litigation and Compliance practice group at Birmingham, Ala.-based Bradley Arant Boult Cummings LLP. "The CFPB's proposed amendments to Regulations E and Z would certainly broaden the scope of what is considered a 'prepaid account' under the current law."

Regulation E establishes the rights and liabilities of consumers and participants in electronic funds transfers, while Regulation Z, the Truth in Lending Act, states a lender must disclose to the borrower the annual percentage rate, or the cost of credit to the consumer.

Because the bureau has made it clear in the past that it is aware of the risks consumers face when they use or buy virtual currencies, it may take further steps to add protections for Bitcoin users, Kolodziej added.

"They specifically state in the most recent proposal that they have not resolved the issue of whether, and to what extent, existing laws or the proposal may apply," Kolodziej said.

During the feedback period, which will continue into February, the CFPB is encouraging and accepting public comments. Those providing oral feedback also have to submit a filing to document the discussion in writing.

Developing the new regulations will take a long time, Aite's Aufseeser said. "It's a good thing that they are doing this type of due diligence and putting a lot of thought into it."

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