President Biden’s Executive Order on Ensuring Responsible Development of Digital Assets: Implications for Consumer Protection and 3 Steps for Issuers of Digital Assets
Consumer protection is a key issue in President Joe Biden’s executive order on ensuring responsible development of digital assets, released on March 9.
Digital assets, the order states, have “profound implications for consumer protection.” The order further states that it is necessary to “take vigorous action to reduce the risks that digital assets may pose to consumers” through the development of “sufficient oversight and standards.”
Against this backdrop, President Biden directed financial regulatory agencies to submit recommended potential regulatory and legislative measures to protect consumers. Among the consumer protection policy issues that are highlighted in the order are:
- Expand equitable access to financial services and mitigate the disparate impacts of financial innovation in digital assets and digital payment technologies
- Improve the affordability of financial services products related to digital assets and digital payment technologies
- Adequate protections for sensitive financial data
- Adequate protections for custodial arrangements relating to client assets and funds
- Adequate disclosure of risks associated with digital asset products and related services
- Prevent exploitative aspects of digital assets and digital payment technologies
Key points to remember
Potential extension of UDAAP and Fair Lending Principles to digital assets.Historically, digital assets have not been subject to significant consumer protection enforcement, such as the enforcement of state or federal Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) laws. However, the executive order names the Consumer Financial Protection Bureau (CFPB) in several places and underscores UDAAP’s potential to become a key enforcement tool in the digital asset space in the future.
Among the practices that may be subject to scrutiny are those that take advantage of a consumer’s misunderstanding of the products or cause harm to consumers that they could not avoid on the basis of the information available. . Similarly, the order suggests that fair lending principles can be used in the digital asset space, including the principles of redlining (i.e. excluding certain geographies from access to a product or service due to the minority composition of the geographical area). It is unclear how the government would enforce fair lending principles outside the lending space, but here too UDAAP is likely to become a central focus.
It’s not just about crypto trading. Although the title only refers to “digital assets”, the text of the order covers a wide range of financial services products and technologies. This is particularly notable with respect to payment processing, but could also encompass crowdfunding and other transactions in certain consumer markets such as those related to non-fungible tokens (NFTs).
Further, in the definitions section, the term “digital assets” is defined to include “other representations of value, financial assets and instruments, or claims that are used to make payments or investments, or to transmit or exchange funds or the equivalent thereof”. “Thus, the consumer protection regulations that ultimately flow from this executive order could encompass a variety of fintech business models, some of which may be unexpectedly broad, including crowdfunding and other consumer businesses that integrate consumer transaction mediation platforms, in particular through NFTs.
Expect a short-term review. While the order is unlikely to result in new regulations any time soon, it could cause consumer protection agencies such as the CFPB and FTC to immediately apply increased scrutiny under the UDAAP to the development and the sale of digital assets. As a result, companies should expect increased regulatory oversight in the fintech sector in the second half of 2022.
Three steps for issuers of digital assets
Steps digital asset issuers should consider now to identify and mitigate risk include:
- Review and improve marketing materials and information provided to consumers regarding digital assets, to ensure that consumers understand how digital assets work and any material costs or risks associated with the product.
- Ensure that consumers have equal access to the product, regardless of race, ethnicity, age, gender (or any other basis prohibited under fair lending laws), and that it does not there are no geographical restrictions unrelated to legitimate and non-discriminatory commercial considerations.
- Assess and fix any product features that may be considered “abusive” under UDAAP. The main characteristics of an abusive product or service include that it takes unreasonable advantage from a consumer’s lack of understanding of the material risks, costs or terms of the product or service, or the reasonable reliance of a consumer on the issuer of the digital asset to act in the interest of the consumer.