A pair of tech trade groups are suing the federal government over its attempts to regulate digital payment apps and wallets like banks. A lawsuit filed against the Consumer Financial Protection Bureau claims that new regulations introduced last year are arbitrary and capricious, and put “innovation at risk.”
The legal action comes not long after last year’s high-profile scandal in which a fintech startup called Yotta Savings managed to lose track of $100 million in customers’ funds. Users did not realize that Yotta itself is not technically a bank, meaning they did not have their own bank accounts with Yotta and were not entitled to deposit insurance. An intermediary called Synapse, which sent Yotta deposits to accounts at actual banks, collapsed abruptly in May, and there has since been a back-and-forth of finger-pointing with no party able to account for exactly where the money went. Many customers still have not recovered their funds. Yotta encouraged users to save by rewarding them with random cash prizes.
This is all to say, it is rich that a group of tech lobbying groups are now trying to push back on regulation that could harm “innovation.” The new rules, which went into place in December, let the CFPB oversee digital payment processors’ compliance with federal privacy and fraud laws through proactive examinations. Apps included under the rule include Apple Pay, Google Wallet, PayPal, Venmo, and Cash App. The trade groups filing suit in opposition to the law, NetChoice and TechNet, claim the CFPB did not sufficiently identify consumer risks or gaps in oversight to justify the rule.
The new lawsuit also comes as Block, the operator of Cash App, has agreed to pay $255 million to regulators that alleged the company violated banking laws, including through insufficient fraud protection. “Block employed weak security protocols for Cash App and put its users at risk,” the CFPB said in a release. “While Block is required by law to investigate and resolve disputes about unauthorized transactions, the company’s investigations were woefully incomplete.”
Most average consumers do not understand the nuanced technical distinctions when dealing with different upstart financial technology companies. The CFPB has warned that money held in accounts with apps like Venmo and Cash App could be FDIC insured but only under certain circumstances, such as if users request a debit card. Another popular financial technology company, Chime, does offer FDIC insurance because customers receive their own bank account. Services like Venmo and Yotta essentially pool every user’s money in one custodial slush fund, which is not eligible for FDIC insurance.
That does not even begin to mention all the problems with crypto, where users of wallets have regularly been the victims of attacks draining their accounts because they did something as minor as clicking a button by mistake. Cryptocurrency transactions typically cannot be reversed, meaning once the bitcoin leaves a wallet, it is gone for good. That is why North Korea has relied on stealing digital currency to fund its nuclear weapons development over traditional fiat currency which is subject to strict anti-money laundering laws that would prevent large funds from easily moving.
But alas, President-elect Trump is all in on deregulation and crypto in particular, so this lawsuit against the CFPB may not even be necessary a few days from now.
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