The CFPB Puts a Bull's Eye On Elon Musk and Cryptocurrencies

Last November, the Consumer Financial Protection Bureau proposed a rule that would place digital wallets — like PayPal, Venmo and CashApp — under increased scrutiny. They want to regulate them like banks. The CFPB claims that they “might uncover compliance deficiencies indicating harm or risks of harm to consumers” (emphasis added), but provides no concrete examples of what these would look like or if these hypothetical harms have ever come to fruition.

Opponents like Amazon argue the rule should not apply to payment services that don’t hold funds, but really it should not be implemented at all. This proposed rule is part of a broader attempt by the Biden Administration to crack down on two of its favorite targets: cryptocurrencies and Elon Musk.

This proposed regulation comes in the midst of federal harassment from the Biden Administration against Musk’s business empire, with investigations coming from a slew of federal agencies including, but not limited to, the Department of Justice, the Federal Aviation Administration, the Federal Trade Commission, the Securities and Exchange Commission, and the National Labor Relations Board. This harassment is coupled with slights against Musk, like excluding the Tesla CEO from Electric Vehicle summits, and passing over his Starlink internet service in a decision that a dissenting FCC Commissioner described as “choosing to prioritize its political and ideological goals at the expense of connecting Americans”.

How is Biden’s vendetta against Musk related to digital wallets? Well, Musk has repeatedly stated plans to add payments to his social media platform X.

X.com is a domain Musk reused for his rebranding of Twitter, but in its previous incarnation, it was a predecessor of PayPal. Now Musk’s vision is to transform X into an “everything app,” and that will include payments. Musk says X will roll out peer-to-peer payments this year. In light of the Biden Administration’s targeting of Musk, it may not be a coincidence that more regulatory hurdles are being placed in his way.

The other unspoken reason the CFPA wants to regulate digital wallets is to claim oversight of person to person transactions in cryptocurrency. The CFPA states in section 109(a)(2) of its explanation of the proposed rule that for “certain crypto-assets, including Bitcoin … under the Proposed Rule, the transfer of funds … would qualify as a ‘consumer payment transaction’." Because of this interpretation, the CFPA says that “providing a covered [Bitcoin] payment functionality through a digital application] would fall under the authority of the proposed rule.”

From the proposal, it is unclear if blockchains themselves like Bitcoin’s and others’ would be classified as “nonbank covered persons” and thus subjected to regulations that are impossible for them to comply with, as decentralized networks with nobody in charge to make required changes. This could, potentially, lead to the Bitcoin network being subjected to civil action from the CFPA, and eventually subjected to sanctions when it inevitably fails to comply. While this lack of clarity likely (and hopefully) stems from an all-too-common failure of federal authorities to understand modern technologies, a rule unclear on the distinction between the blockchain itself and online wallet providers opens the door for this and future administrations to ruin cryptocurrency.

The attempt to classify certain payment processors as larger participants of financial markets also represents a potential move towards the implementation of a Central Bank Digital Currency, a policy Biden has signed an Executive Order to explore. By subjecting payment processors to this new regulatory oversight, the government could be opening the door to later requiring some or all wallets to host a CBDC. Forcing people to use CBDCs would dramatically increase the ability of the federal government to observe and control financial transactions, with all bank accounts and wallet balances being under the control of the Federal Reserve.

The CFPB’s proposed rule to treat digital wallets like banks is no good. Best case scenario, it’s an attempt by the Biden administration to stick it to Musk. But worse, it could be an attempt to open the door for the government to end cryptocurrencies and control all private financial transactions.