The Wild West of decentralized crypto – also known as digital or virtual – currencies may be getting a sheriff. As first reported by Bloomberg’s Carter Dougherty, the Consumer Financial Protection Bureau (CFPB) has committed to looking into the consumer protection issues around these protocols.
U.S. lawmakers, government agencies and law enforcement have all taken an interest in virtual currencies, and especially in Bitcoin (capital B for the technology, small b for the currency), the most well-known digital asset. (See the infographic for an explanation of how Bitcoin works.) A Congressional hearing last fall featured testimony from staff of the Financial Crimes Enforcement Network, which enforces the nation’s laws against money laundering, and Justice Department, the country’s top law enforcement body. In March, the Internal Revenue Service issued a notice on the tax consequences of virtual currency transactions. There’s been action at the state level, too. In April, the Texas Department of Banking issued a “Supervisory Memorandum” explaining when and if the state’s money transmission law applies to virtual currency activities.
With all that action, why is this news?
Because until now, as a Government Accountability Office report released yesterday emphasizes, no one at the federal level has been focused on the consumer protection issues around these emerging technologies.
What consumer protection issues?
It is early days for digital currencies and very few consumers are using digital currencies. According to Blockchain.info, a website that tracks Bitcoin, there were $44 million worth of bitcoin transactions yesterday. In contrast, there are more than $5 billion MasterCard transactions each day, every day. So you may be asking, “Why worry about consumer protection?” We care because there are ways consumers can get hurt when they spend, store or invest in crypto currencies.
One way you can get hurt is by losing the key to your bitcoin wallet, depending on the service you use. Blockchain.info warns its wallet users that if you forget your password, “Your Bitcoins in your wallet are unfortunately lost.” Of course, you can lose your bitcoins in an exchange, too, as happened with the collapse of Mt. Gox. This may not sound like such a bad thing if you think virtual currencies are play money, but as of today, one bitcoin is worth about $600. If you have a wallet full of them, that’s real value.
The technological innovations that flow from digital currencies offer a tremendous opportunity to return power to consumers. More immediately, these protocols may provide much-needed competition to the current payments system, resulting in faster, more secure, and cheaper payments. But, for a system that was designed to eliminate the need for trusted third parties, many businesses are cropping up that act as intermediaries among and between crypto currency owners and users. For this reason, we’re glad to see there’s a cop on the beat to ensure that consumer protection is top of mind as these technologies evolve.