Ending doubts regarding 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 it’s likely a sign of things to come.
The agency hinted at increased enforcement in a summary of consumer crypto complaints in November 2022. The CFPB acknowledged an investigation for the first time that same month, when it published a decision in the case.
Crypto companies with direct-to-consumer products should take note — and consider steps to mitigate risk.
What Happened?
The CFPB sent a Civil Investigative Demand (CID) for testimony in December 2021 to Nexo, a cryptocurrency platform that offers an earned-interest product and lets customers make deposits.
The CID focused on whether Nexo made “false or misleading representations to consumers” about its safeguards used to protect crypto assets. The CFPB also stated that the investigation included potential violations of the Electronic Funds Transfer Act, confirming its view that the law applies to crypto assets.
Nexo filed a petition to set aside or modify the CID. It argued that the SEC views interest-bearing crypto accounts as securities that are subject to SEC regulation and exempt from CFPB jurisdiction.
CFPB Director Rohit Chopra denied the petition. He noted that Nexo had been unwilling to fully concede that its product was a security subject to SEC regulation and that “it [was] too early to tell whether Nexo … was required to be registered with the SEC,” and exempt from the CFPB’s jurisdiction.
Since then, Nexo announced it had made “the regrettable but necessary decision” to phase out its products and services in the U.S. after “inconsistent and changing positions among state and federal regulators.”
What does this mean?
Though this is the first publicly identified CFPB crypto investigation, there are likely more on its docket.
This matter also reveals that CFPB 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 notify a market of its plans to address certain types of consumer harm. Three top crypto complaint themes likely to trigger CFPB interest include:
- Fraud: 40% of consumer complaints in the bulletin were a result of having been victimized by fraudulent activity or scams in the crypto ecosystem.
- Access to Funds: Many consumers reported struggling to access their funds due to issues with crypto platforms and the 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 company customer service as non-responsive or non-existent. The CFPB launched an initiative to improve customer service this year with Director Chopra’s stated goal “to ensure the legally enshrined right to obtain basic customer service.”
Looking Forward
We expect increased enforcement action aimed at addressing the themes in the Crypto-asset Complaint Bulletin. Crypto companies that have not affirmatively subjected themselves to SEC or CFTC authority may be more vulnerable to CFPB scrutiny. In an environment of increased regulatory risk, we recommend that crypto companies review 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 any questions regarding recent regulatory trends and best practices for building compliance programs if your company is subject to the CFPB’s enforcement and examination powers.