The CFPB makes its entrance: crypto products are targeted

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Putting to rest doubts about its interest in the space, the Consumer Financial Protection Bureau (CFPB) has for the first time publicly acknowledged its investigation of a crypto company – and that’s likely a sign of things to come.

The agency hinted at increased enforcement in a summary of crypto consumer complaints in November 2022. The CFPB first acknowledged an investigation that same month, when it issued a ruling in the case. .

Crypto companies offering direct-to-consumer products should take note of this and consider steps to mitigate risk.

What happened?

The CFPB sent a Civil Investigation Request (CID) for testimony in December 2021 to Nexo, a cryptocurrency platform that offers an interest-earned product and allows customers to make deposits.

The CID focused on whether Nexo made false or misleading statements to consumers regarding its safeguards used to protect crypto assets. The CFPB also said the investigation included potential violations of the Electronic Funds Transfer Act, confirming its view that the law applies to crypto-assets.

Nexo has filed a motion to rescind or modify the CID. He argued that the SEC considers interest-bearing crypto accounts to be securities subject to SEC regulation and exempt from CFPB jurisdiction.

CFPB director Rohit Chopra denied the request. He noted that Nexo had been unwilling to fully admit that its product was an SEC regulated security and that it [was] too soon to say whether Nexo should be registered with the SEC and exempt from the jurisdiction of the CFPB.

Since then, Nexo has announced that it has taken the regrettable but necessary decision to phase out its products and services in the United States after inconsistent and shifting positions among state and federal regulators.

What does it mean?

While this is the CFPB’s first publicly identified crypto investigation, there are likely others on its record.

This case also reveals that the CFPB’s crypto investigations have been ongoing since at least the fourth quarter of 2021. Less than two weeks before issuing the Nexo decision, the CFPB issued a crypto-asset complaint bulletin. The CFPB typically uses these bulletins to inform a market of its plans to remedy certain types of consumer harm. The three main crypto complaint topics likely to pique the interest of the CFPB include:

Fraud: 40% of consumer complaints in the newsletter resulted from fraudulent activity or scams in the crypto ecosystem. Access to funds: Many consumers reported having difficulty accessing their funds due to issues with crypto platforms and freezing of funds before filing for bankruptcy protection. Poor customer service: A major issue cited in the complaint bulletin was the inherent lack of customer service provided to consumers in the crypto market. Consumers described the company’s customer service as unresponsive or non-existent. The CFPB launched an initiative this year to improve customer service with Director Chopras’ stated goal of ensuring the legal right to basic customer service.

Looking forward

We expect an increase in enforcement actions to address the themes of the Crypto-Asset Complaint Bulletin. Crypto companies that have not affirmatively submitted to the authority of the SEC or CFTC may be more vulnerable to CFPB scrutiny. In an environment of heightened regulatory risk, we recommend that crypto companies look at their products and services from a consumer/end-user perspective and pay attention to customer complaints.

Contact Melissa Baal Guidorizzi and Daniel Forester if you have questions regarding recent regulatory trends and best practices for building compliance programs if your business is subject to the CFPB’s enforcement and review powers.

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