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On April 25, 2022, the Consumer Financial Protection Bureau (CFPB) issued a request for comment on updated procedures referring to the “Inactive Authority to Examine Nonbank Companies That Pose a Risk to Consumers.”
While the CFPB has historically focused its efforts on activities outside of cryptoassets, the agency’s recent call in the Executive Order—along with updated procedural rules, consumer protections, and risk determinations—are becoming increasingly important to cryptocurrency compliance strategies.
The CFPB first wants to expand its consumer protection oversight to non-bank financial institutions whose activities pose significant risks to consumers – such as payday lending or other potentially abusive or deceptive practices.
Second, the agency seeks to increase visibility in determining risk for supervised non-banks. It states that “in order to provide better guidance to the market on how the CFPB will make decisions, the CFPB is updating an aspect of its risk determination procedures to authorize the release of certain information about any final decision.”
What does this mean for Elliptic customers?
What does consumer protection look like for a cryptoasset compliance program? Consumer protection for cryptocurrency compliance will require market participants to invoke a more holistic strategy for risk management and mitigation – beyond anti-money laundering and anti-terrorist financing policies and procedures. With the understanding that the CFPB and other regulatory agencies will scrutinize the products and services of these crypto market participants, key stakeholders can avoid fines or problems by ensuring that their risk-based approach is impervious to regulatory scrutiny.
As noted in another recent Elliptic blog post, a holistic strategy for consumer protection standards could include “transparency requirements of cryptoasset services offered to consumers – including code-free disclosures for DeFi operations – to liquidity requirements to ensure that consumers can access efficient and healthy financial markets”.
At a high level, cryptoasset stakeholders need fine-tuned insight into who their customers are and what they are doing in order to mitigate unreasonable risk exposure to those customers, the market and their business. Most importantly, cryptoasset stakeholders must be able to show – not to say – how they take a risk-based approach to their crypto offering.
For VASPs offering cryptocurrency lending products, tools such as Elliptic’s wallet review or crypto transaction tracking can help strengthen risk determination during the underwriting process. For non-banks and non-banks that offer investment products to their retail clients, Elliptic’s VASP screening and investigation tools can help manage counterparty risk and prevent bad actors from using their services.
For all participants in the cryptoasset market, Elliptic’s tools can help streamline procedures that codify due diligence and exemplify their priority of consumer and investor protection from the outset. The ability to confirm product protection standards will soon become the norm for all crypto-asset transactions. If this is not already part of the stakeholder compliance framework, it should be as soon as possible.
Elliptic believes that compliance is a competitive advantage for all participants in the cryptoasset market. But as a company’s offerings become more innovative and technologically advanced, so should their compliance regimes.
Responsible regulation has the potential to strengthen the power of the cryptoasset market, but this will not happen if the industry exists in an opaque “black box”. Security and integrity should be the rule, not the exception, for the crypto-asset market. The industry can help address these issues by proactively implementing transparent risk-based compliance approaches before regulators come knocking on the door.
Compliance Financial Services Americas
