In its much-anticipated cryptocurrency executive order issued earlier this month, the Biden administration called for a coordinated interagency approach to the regulation of digital assets and to the study of their potential risks.
A significant part of this effort focuses on the nation’s primary consumer protection agencies, the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB).
Historically, the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Financial Crimes Enforcement Network (FinCEN) have played the primary roles in regulating digital assets, with the FTC and CFPB largely taking a wait-and-see approach. But this has left open a regulatory gap for crypto activities that do not involve a security or a commodity derivative.
The Biden administration is shifting focus to consumer protection, naming it as the first principal policy objective of the executive order. Specifically, the order directs the heads of the FTC and CFPB, among many other agencies, to submit a report on the implications of developments in and the adoption of digital assets.
Of particular relevance to the FTC and CFPB, the order encourages the agencies to consider what effects the growth of digital assets could have on competition policy and how privacy and consumer protection measures within their jurisdictions can serve digital asset users. The report also should contain policy recommendations that include potential regulatory and legislative actions to protect U.S. persons.
The new focus by the FTC and CFPB on the digital asset space raises important questions. For example:
- What issues will the FTC and CFPB focus on?
- What will enforcement in this area look like?
- What authority will the agencies rely on, or will new authority be needed to regulate the space?
The FTC and CFPB have broad authority to investigate and protect against “unfair” and “deceptive” acts and practices (the CFPB also has authority over “abusive” acts and practices). These powers provide the FTC and CFPB with a great deal of flexibility and may play an important role in shaping the regulation of digital asset activities that fall outside of the SEC’s jurisdiction over securities.
Last year the FTC reported a dramatic increase in cryptocurrency scams year over year, specifically calling out bogus investment websites and scams involving impersonation of celebrities promising to multiply consumers’ money. Plaintiffs have also initiated class action lawsuits against real celebrities for their roles in endorsing cryptocurrency projects, only to sell their holdings in alleged pump-and-dump schemes. The FTC would be well equipped to apply its endorsement guides to this activity to better protect consumers.
The CFPB could assert authority over interest-bearing cryptocurrency accounts and crypto lending products that are increasingly being offered by cryptocurrency exchanges. The CFPB may also explore whether it has authority over custodial cryptocurrency wallets through its prepaid rule under Regulation E.
Per Biden’s order, the FTC and CFPB will include in their report their policy recommendations, including potential regulatory actions, as appropriate to protect consumers and expand access to safe and affordable financial services. Whether additional budget resources are provided to the agencies to fulfill the tasks outlined in the executive order remains to be seen.