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SDNY: EFTA Applies to Crypto

posted by Adam Levitin

I'm teaching cryptocurrency today in my Payment Systems class, and I'd been puzzling about why no one has applied the Electronic Fund Transfers Act and Reg E thereunder to crypto: after all, if you have a crypto account with an exchange, it would seem to be an "account" at a "financial institution" that is primarily for personal, family, or household purposes and is used for electronic transfers of "funds." In fact, I had just emailed Bob Lawless for a sanity check on this, when I came across a very recent SDNY decision that held that the EFTA applies to crypto. That's a huge consumer protection win. Reg E has important consumer protections regarding unauthorized transactions, error resolution, and provision of receipts and periodic statements. It also creates huge compliance headaches for crypto exchanges, which are not set up for dealing with any of those problems. All of the Zelle scam error resolution issues are now going to become crypto scam error resolution issues. And the ruling also indicates that consumer protection at cryptocurrency exchanges is now squarely within the existing regulatory authority of the Consumer Financial Protection Bureau. This could get interesting. 


The EFTA act defines an account specifically opposite to what you state above. The text says:

"the term “account” means a demand deposit, savings deposit, or other asset account (other than an occasional or incidental credit balance in an open end credit plan as defined in section 1602(i) [1] of this title), as described in regulations of the Bureau, established primarily for personal, family, or household purposes, but such term does not include an account held by a financial institution pursuant to a bona fide trust agreement;"

As I understand it - the last line is the key. EFTA was clearly intended for banks and to include credit cards (which are issued by banks), but to exclude CUSIP accounts for stocks and bonds.
Crypto clearly is in this latter category despite their claims of being "digital cash".

I did forget to note, however, that I believe most exchanges in the US are registered as "money transmitters" - like remittance companies.
So in theory, the EFTA should apply to them under their licensing... except that money transfer licensing isn't federal; all money transfer licenses today are state (if I recall correctly).
So the EFTA is not really for real world "funds transfer" entities because the Federal government has deferred regulation and licensing of money transfer companies to the states.

c1ue--I'm sorry, but you're wrong in almost everything you write here.

(1) It's EFTA 101 that EFTA does not cover credit cards. They are not an "asset account" but a credit account under 15 USC 1693a(2).

(2) the exclusion of stocks/bonds is part of an express exclusion from the definition of "electronic fund transfer," in 15 USC 1693a(7)(C), not "account" (excluding "any transaction the primary purpose of which is the purchase or sale of securities or commodities through a broker-dealer registered with or regulated by the Securities and Exchange Commission"). There's no way to extend that by analogy to crypto because there aren't regulated broker-dealers involved. It's irrelevant if crypto is a security or commodity, etc., for other purposes.

(3) the bona fide trust agreement exclusion in 15 USC 1693a(2) is to exclude trust accounts, from the EFTA, nothing more.

(4) state money transmitter laws do not supersede the federal EFTA. They are additional, not alternative, regulations. (There is no federal money transmitter licensing, but engaging in unlicensed money transmission is a federal felony.) EFTA is absolutely for real world funds transfer entities. Just see what Western Union says here: https://www.westernunion.com/blog/en/us/guide-to-electronic-fund-transfers/

Does transferring bitcoin from one wallet to another (presumably the most common bitcoin "transaction") fall under the act?

FredW—if it’s a transfer from a self-hosted wallet, EFTA doesn’t apply. If it’s a transfer from a wallet at an exchange, then I think it does.

If EFTA is a federal law applying to money transmitters - why is there no actual Federal regulation of money transmitters in the form of licensing or oversight authority?
The latter is not something I came up with on my own - I heard it directly from an under-secretary of the Treasury and ex-Fed official in a CBDC discussion in Feb 2022.
And so: if the Federal government does not actually license or regulate money transmitters - how exactly does enforcement occur?
I was shocked by that pronouncement, but it was reinforced in the ensuing Q & A when other people also asked why this situation existed.
Note that banks, on the other hand, must be licensed by the federal government in order to operate across state lines and so there is an enforcement mechanism via the regulator.

And as follow up to the above: note again the conspicuous lack of Treasury, Federal Reserve, OCC, etc type regulatory actions regarding any of the crypto exchanges.
The actions seen are almost exclusively from SEC - precisely because of these exchanges registering as money transmitters. They aren't CUSIP in the regulatory sense nor are they banks.
The whole setup is an obvious hack.

The EFTA extensively “regulates” money transmitters such as remittance transfer providers. There is a rule promulgated pursuant to EFTA known as the Remittance Transfer Rule (it’s a part of Reg E). The CFPB routinely enforces this regulation. Here is more information:

States license remittance transfer providers. That is right. States also issue the license to lots of other consumer financial services providers (off the top of my head): banks; debt collectors; and assorted lenders.

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