President Biden's Executive Order on Ensuring Responsible Development of Digital Assets: Consumer protection implications, and 3 steps for digital asset issuers
Consumer protection is a key issue in President Joe Biden’s Executive Order on Ensuring Responsible Development of Digital Assets, which was issued on March 9.
Digital assets, the Order states, have “profound implications for the protection of consumers.” The Order further states that it is necessary to “take strong steps to reduce the risks that digital assets could pose to consumers” through the development of “sufficient oversight and standards.”
Against this backdrop, President Biden has directed the financial regulatory agencies to submit recommended potential regulatory and legislative actions to protect consumers. Among the consumer protection policy issues that are highlighted in the order are:
- Expanding equitable access to financial services and mitigating disparate impacts of financial innovation in digital assets and digital payments technologies
- Improving affordability of financial services products related to digital assets and digital payments technologies
- Adequate protections for sensitive financial data
- Adequate protections for custodial arrangements relating to customer assets and funds
- Adequate disclosures of risks associated with digital asset products and related services
- Preventing exploitative aspects of digital assets and digital payments technologies
Potential expansion of UDAAP and fair lending principles to digital assets. Historically, digital assets have not been the subject of significant consumer protection enforcement, such as enforcement under state or federal unfair, deceptive or abusive acts or practices (UDAAP) laws. However, the executive order names the Consumer Financial Protection Bureau (CFPB) in multiple places and highlights the potential for UDAAP to become a key enforcement tool in the digital assets space moving forward.
Among the practices that may be subject to scrutiny are those that take advantage of a consumer’s lack of understanding regarding the products, or that cause harm to consumers that they could not avoid based on available information. Likewise, the Order suggests that fair lending principles may be used in the digital assets space, including redlining principles (ie, the exclusion of certain geographies from access to a product or service based on the minority composition of the geography). It is unclear how the government would enforce fair lending principles outside of the lending space, but here too, UDAAP is likely to become a central focus.
It’s not just about crypto trading. Although the headline refers only to “digital assets,” the text of the Order concerns a broad range of financial services products and technologies. This is most notable with reference to payment processing, but could also encompassing crowdfunding and other transactions in certain consumer markets such as those tied to non-fungible tokens (NFTs).
Furthermore, 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 arise from this executive order could encompass a variety of fintech business models, some of which may be of unexpected breadth, including crowdfunding and other consumer businesses that integrate platforms for mediating consumer transactions, particularly through NFTs.
Expect short-term scrutiny. Although the Order is unlikely to result in new regulations soon, it may cause consumer protection enforcement agencies such as the CFPB and the FTC to immediately apply increased scrutiny under UDAAP to the development and sale of digital assets. Accordingly, companies should expect regulatory scrutiny across the fintech sector to increase in the second half of 2022.
Three steps for digital asset issuers
Steps that digital asset issuers should consider now to identify and mitigate risk include:
- Review and enhance marketing materials and consumer disclosures relating to digital assets, to ensure that consumers understand how the digital assets operate and any fees or material risks relating to the product.
- Ensure that consumers have equal access to the product regardless of their race, ethnicity, age, gender (or any other prohibited basis under fair lending laws), and that there are no geographic restrictions unrelated to legitimate, non-discriminatory business considerations.
- Evaluate and address any features of the product that may be viewed as “abusive” under the UDAAP law. Key characteristics of an abusive product or service include that they take unreasonable advantage of a consumer’s lack of understanding of the material risks, costs, or conditions of the product or service, or a consumer’s reasonable reliance on the issuer of the digital asset to act in the interests of the consumer.
To learn more about the implications of the Executive Order for your business, please contact the authors or your usual DLA Piper relationship partner.