The Consumer Financial Protection Bureau Identifies Self-Custody Wallets As Potential Compliance Targets

The recent announcement that the CFPB (Consumer Financial Protection Bureau) has identified non-bank entities that create or service digital wallet products as potential regulatory targets has caused a stir in the Web3 world.

The CFPB's dedication to safeguarding consumers and ensuring equitable treatment from financial institutions remains a central aspect of its broader mission. This commitment persists even as the financial landscape evolves through the adoption of new technologies.

Non-bank entities with wallets refer to both web2 and web3 companies that offer digital wallets, such as PayPal, Venmo, and Google Wallet. This could also include Metamask, Rainbow Wallet, Rabby, or even Phantom (Solana wallet). These platforms allow users to store digital assets or money, make payments, and perform other transactions.

For crypto enthusiasts, this news may come as a surprise as digital wallets are often associated with decentralization and the avoidance of traditional financial institutions. However, with the increasing popularity and usage of these platforms, they have caught the attention of regulators.

The CFPB is concerned that these non-bank entities may not comply with federal regulations to protect consumers from fraud and abuse. This includes requirements for transparency, dispute resolution processes, and consumer data protection.

While these regulations are already in place for traditional financial institutions, the CFPB's announcement about non-bank entities signals a shift towards regulating emerging technologies in the financial sector.

But what does this mean for consumers who use digital wallets?

Which companies will be impacted?

The proposed new regulations would give the CFPB "supervisory authority over certain nonbank covered persons participating in a market for “general-use digital/consumer payment applications."

To fall under this new regulation, these non-bank entities would need to be processing more than $5 million or more in customer transactions per year.

Smaller companies and startups may not be impacted, but more prominent players in the digital wallet space must ensure compliance with the CFPB's regulations. Crypto companies that offer wallet services of any kind may also fall under the CFPB's purview.

What does this mean for the future of digital wallets?

While these proposed regulations may seem daunting for companies in the digital wallet space, they could ultimately benefit consumers. Holding these nonbank entities to the same standards as traditional financial institutions could lead to greater consumer protection and more transparent practices.

There are already multiple CFPB rules that apply to digital products in traditional banks, such as the Electronic Fund Transfer Act and the Truth in Lending Act. The addition of this new regulation would provide further oversight and enforcement for these companies, 

However, these regulations have the potential to also stifle innovation in the digital wallet space. Startups and smaller companies may struggle to comply with the costs and requirements of the CFPB's regulations, potentially giving more prominent players a competitive advantage.

Riding the line between consumer protection and innovation will be a crucial challenge for the CFPB as they move forward with this potential push to regulate non-bank entities.

At Webacy, we’re always keeping our eye out for potential signals and moves that governments make around the world that affect the safety of consumers - especially when it comes to taking control of their digital assets. We’re always supportive of regulation that brings consumer protection back to the forefront. We recommend that consumer protection with wallets starts with education and providing tools to the consumer to empower them to protect themselves. Our suite of tools is the foundation to this. Learn more about our products here, and how they’re protecting tens of thousands of consumers already today.