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Financial Services Law Blog Legal updates, news, and commentary from the attorneys of Baker Sterchi Cowden & Rice LLC

Bitcoin, Bankers, and Barriers to Legislation

December 4, 2017 | Megan Stumph-Turner

Its exact origins are somewhat of a mystery, but it is believed that Satoshi Nakamoto, perhaps a pseudonym for more than one creator, first developed the concept of the bitcoin in 2007. In October of 2008, “Nakamoto” published his first paper describing the peer-to-peer, online-based cash system.  The first Bitcoin transaction occurred in early 2009, and since then, the cryptocurrency market has exploded, and now major retailers, including Overstock.com, Microsoft, Dish Network, Etsy, Expedia, and even Subway have begun accepting Bitcoin for transactions in some capacity. And its value has catapulted, now exceeding $11,000 USD.

But what’s on the other side of the coin?  First, Bitcoin users can make anonymous transfers, which lends itself well to criminal, underground activity.  Likewise, a virtually unregulated market leaves Bitcoin transactions subject to a high risk of fraud, with no recourse for jilted consumers.  While some individual U.S. states have introduced legislation attempting to regulate cryptocurrency, the federal government has not, leaving the environment unstable.

Furthermore, the exponential increase in its value and lack of regulation leaves many experts wondering if this Bitcoin craze is just a bubble, only to be followed by a crash.

While cryptocurrency faces skepticism, the blockchain technology used to effectuate Bitcoin transfers has earned much praise as an alternative for future banking systems, particularly in expediting international payments.   And in light of this year’s highly publicized data breaches, financial institutions may be well advised to explore the use of blockchain technology to prevent public dissemination of sensitive information, as it is touted for its resilient data protection capabilities.

Financial institutions in particular have been wary about the growing popularity of the Bitcoin.  Jamie Dimon, CEO of JPMorgan Chase Bank, issued a statement questioning its legitimacy.  “It’s just not a real thing, eventually it will be closed,” said Dimon, who further threatened to “fire in a second” any JPMorgan trader who attempted to trade Bitcoin.  The Bank’s CFO, Marianne Lake, shortly thereafter qualified Dimon’s statements, avowing that JPMorgan remains  “ very open minded to the potential use cases in future for digital currencies that are properly controlled and regulated.”  This sentiment reflects that held by many institutions – most are open to the idea of a new type of currency, but are reluctant to engage until the currency is widely regulated.

Regulating the Bitcoin presents several challenges.  For one thing, while Bitcoin transcends borders, there is no uniformity among nations, or even states in the U.S., about how it should be treated or regulated.  Furthermore, there is inconsistency among legislators and the judiciary about whether Bitcoin is a currency or a commodity, thus making legislation difficult to draft.  Even so, the SEC has recently expressed its intent to begin regulating the sale of Bitcoin and other cryptocurrency.

Fad or not, the Bitcoin is sure to be a continued hot topic internationally among regulators and financial institution in the coming months.

Update - Senate Unwinds CFPB Arbitration Rule

November 9, 2017 | Megan Stumph-Turner

It ended before it ever began. As reported in a prior post, in July of 2017, the Consumer Financial Protection Bureau (the “CFPB”) enacted a new rule that would have prohibited financial institutions from including arbitration provisions in their contracts with customers wherein the customers waived their right to bring class action litigation against the creditor.   The new rule was set to take effect in early 2018.

Not under our watch, said the United States Senate.  Promptly following the CFPB’s issuance of the new arbitration rule, Sen. Mike Crapo of Indiana introduced S.J.Res.47, “Providing for congressional disapproval under chapter 8 of title 5, United States Code, of the rule submitted by Bureau of Consumer Financial Protection relating to “Arbitration Agreements.”  The resolution required only a simple majority vote to be enacted into law.  Indeed, the resolution came down to a 51-50 vote, with Vice President Mike Pence breaking the tie.

The CFPB rule was designed with the intention of protecting consumers from an unknowing waiver of their right to pursue legal remedies, such as class action litigation.  Research revealed that 3 out of 4 consumers who had entered into such arbitration clauses in their loan agreements were not aware they had done so.

Critics of the arbitration rule have maintained that the rule is a violation of individuals’ freedom to contract – after all, the consumer arguably could choose not to do business with that lender if unhappy with the terms of the agreement. Furthermore, many observed that the only parties who stood to benefit from the prohibition of class action waivers are the plaintiff’s attorneys representing consumers, and not the consumers themselves, since individual payouts from class litigation are often nominal.

Responding to the Senate’s vote to overturn the arbitration rule, CFPB Director Richard Cordray called the decision a “giant setback for every consumer in this country” and predicted that financial institutions would now “remain free to break the law without fear of legal blowback from their customers.”

Conversely, the Trump Administration commended the result of the Senate’s Vote, in a statement released shortly thereafter:  "By repealing this rule, Congress is standing up for everyday consumers and community banks and credit unions, instead of the trial lawyers, who would have benefited the most from the CFPB’s uninformed and ineffective policy.”

So, while these consumer credit arbitration clauses will likely remain a controversial topic for years to come, the rule intended to get rid of them has instead been extinguished.   

Swift Litigation Ensues Following Equifax Data Hack

September 29, 2017 | Megan Stumph-Turner

Almost immediately upon announcement of the Equifax data breach, the plaintiff’s bar speedily initiated class litigation on behalf of consumers for purported failures by Equifax to protect its customer data. For instance, just one day after the breach became public knowledge, a multi-billion dollar class action suit was filed in Portland, Oregon.

We can undoubtedly expect to see more class action litigation crop up, as it has consistently on a daily basis since announcement of the breach.  Nevertheless, the threat to Equifax does not stop at private litigation.  Several state attorneys general have already announced plans to investigate the breach.

While the timeframe permitted to disclose a data breach varies from state to state, most states do have a requirement that the data breach be disclosed by the soonest reasonable date possible.  The delay by Equifax in announcing the breach will certainly serve as the basis for many state-level investigations and penalties.  It is reported that the breach occurred as early as May 2017, was discovered by Equifax in July 2017, but was not reported until September 7.

Several state attorneys general, including:  Tom Miller, Iowa; Derek Schmidt, Kansas; Joshua Hawley, Missouri; and Douglas Peterson, Nebraska, have joined in a letter to Equifax expressing their concerns with the manner in which Equifax has handled the breach, thus far.  Those concerns include many having to do with customer service and accessibility to information.

In particular, though, the state attorneys general have taken issue with Equifax reportedly requiring consumers to enter into mandatory arbitration agreements or pay fees for credit monitoring services that are otherwise available for free to the public.  The letter states, “The fact that Equifax’s own conduct created the need for these services demands that they be offered to consumers without tying the offer to complicated terms of service that may require them to forego certain rights,” and “We remain concerned that Equifax continues to market its fee-based services to consumers affected by its data breach.”

The letter in its entirety is available here.

In excess of 143 million consumers’ personal information may have been compromised, and a software flaw is reported to be the cause.  The compromised information includes names, dates of birth, addresses, social security numbers, credit card numbers, and even driver’s license numbers.  Experts report that the number of affected consumers will likely increase as time passes.

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About Financial Services Law Blog

The BSCR Financial Services Law Blog explores current events, litigation trends, regulations, and hot topics in the financial services industry.  This blog will inform readers of issues affecting a wide range of financial services, including mortgage lending, auto finance, and credit card/retail transactions. Learn more about the editor, Megan Stumph,  and our Financial Services practice.

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