SDNY Accepts Argument That Crypto Is Subject To Electronic Funds Transfer Act/Regulation E | Cadwalader, Wickersham & Taft LLP

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In a Notice and Order issued on February 22, 2023, Judge Denise Cote of the Southern District of New York (“SDNY”) granted leave to the class action plaintiffs to survive a motion to dismiss and sue Uphold HQ, Inc. on a variety of claims, including that the cryptocurrency is subject to the Electronic Funds Transfer (“EFTA”) Act and Uphold failed to comply with EFTA disclosure and other requirements.

EFTA, which is implemented by Regulation E, 12 CFR 1005, is a consumer financial services law that applies to “electronic funds transfers”. Broadly, electronic funds transfers include all transactions conducted electronically other than wire transfers, from debit card transactions and credit card transactions to loading prepaid cards and sending funds to international. Justice Cote speculates that because Uphold could be considered a financial institution under EFTA and holds cryptocurrency funds on behalf of clients in accounts, the transfer of cryptocurrency could therefore be considered an electronic funds transfer. To date, as Justice Cote noted, the Consumer Financial Protection Bureau (which is the agency responsible for interpreting EFTA) (“CFPB”) has not taken a position on whether EFTA applies to cryptocurrency transfers, as it “continues to analyze the nature of products or services related to virtual currencies. 81 Fed. Reg. 83934, 83978-79 (22 November 2016). To date, cryptocurrency exchanges have not attempted to comply with EFTA and its provisions, in part because the law and Regulation E do not fully align with how cryptocurrency operates. For example, requiring a financial institution to reverse and refund a transaction when it discovers that an unauthorized person has caused transfers from a consumer’s account would not be possible with cryptocurrency because transactions cannot be undone on the blockchain.

Although the finding in the Notice and Order that cryptocurrency transfers are subject to EFTA would not have the force of law, should SDNY ultimately find in this case that cryptocurrency transfers are subject to EFTA. currency are electronic funds transfers for EFTA purposes, then a whole host of disclosures, error resolution protocols, and other requirements would apply to all exchanges that facilitate cryptocurrency transfers. Crypto and consumer protection enthusiasts will be watching this case closely.

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