Two tech trade groups are suing the federal government over its attempts to regulate digital payment apps and wallets like banks. Lawsuit filed against the Consumer Financial Protection Office claims that the new regulations introduced last year are arbitrary and capricious and that “innovation is at risk”.
The legal action comes shortly after last year’s high-profile scandal in which a fintech startup called Yotta Savings managed to lose track 100 million dollars in customer funds. Users didn’t realize that Yotta itself wasn’t technically a bank, meaning they didn’t have their own bank accounts with Yotta and weren’t entitled to deposit insurance. An intermediary called Synapse, which sent Yotta deposits to real bank accounts, collapsed abruptly in May, and since then there has been finger-pointing back and forth, with no one able to explain where the money went. Lots of customers they still haven’t recovered their funds.
That’s all to say, it’s rich that a bunch of tech lobby groups are now trying to push regulation that could hurt “innovation.” The new rules, which took effect in December, allow the CFPB to monitor digital payment processors’ compliance with federal privacy and fraud laws through proactive inquiries. Apps covered by the rule include Apple Pay, Google Wallet, PayPal, Venmo and Cash App. The trade groups suing the law, NetChoice and TechNet, argue that the CFPB has not sufficiently identified consumer risks or oversight gaps to justify the rule.
The new lawsuit also comes after Block, the operator of the Cash App, agreed to pay $255 million to regulators who alleged the company violated banking laws, including insufficient fraud protection. “Block used weak security protocols for the Cash app and put its users at risk,” the CFPB said in rid. “Although Block is required by law to investigate and resolve disputes about unauthorized transactions, the company’s investigations were woefully incomplete.”
Most average consumers don’t understand the nuanced technical differences when it comes to different financial technology startups. The CFPB warned that money in app accounts like Venmo and Cash App could be insured by the FDIC, but only under certain circumstancesfor example if users request a debit card. Another popular financial technology company, Chime, offers FDIC insurance because customers get their own bank account. Services like Venmo and Yotta essentially pool each user’s money into a single trust fund, which doesn’t qualify for FDIC insurance.
That’s not even mentioning all the problems with cryptocurrencies, where wallet users regularly fell victim to attacks that drained their accounts for doing something as trivial as clicking a button by mistake. Cryptocurrency transactions are typically irreversible, meaning that once a bitcoin leaves a wallet, it’s gone forever. That’s why North Korea relied theft of digital currency fund its nuclear weapons development instead of traditional fiat currency subject to strict anti-money laundering laws that would prevent the easy movement of large funds.
But unfortunately, President-elect Trump is all about deregulation and especially cryptoso this lawsuit against the CFPB may not even be necessary in a few days.