CFPB heads up warning about real-time crypto payments

The entry of cryptocurrencies into the real-time payment market is a major concern of the Consumer Financial Protection Bureau, the director said.

Discussing a broader look at Big Tech’s advances into financial services, CFPB Director Rohit Chopra said the agency would have a “heavy” focus on adopting cryptocurrencies for real-time payments, noting that large online companies could push for widespread use of technology.

Which indicates very clearly that the CFPB believes crypto has the potential to become a major competitor to the growing number of real-time rails, including FedWire and The Clearing House’s RTP product in the US, TARGET2 in Europe and CHAPS Sterling in the UK

See also: Real-time payments are coming – but do we need crypto to deliver it?

It also suggests that it sees cryptocurrencies — and particularly of the non-stablecoin variety — as a bigger threat to not just real-time payments, but payments in general than many outside the digital asset industry.

Chopra also pointed to concerns such as Apple’s move to buy now, pay later (BNPL), and told the Financial Times that the CFPB would look into “the implications of Big Tech entering this space,” including whether Apple Pay Later could “reduce competition and innovation in the market.”

Read more: Apple’s Move Into BNPL Space Triggers Alarm at CFPB

Why not Crypto?

Technologically, crypto has the capacity to become a contender. While bitcoin’s 10-minute “block time” between adding new transactions and 60-minute finality is one of the biggest Achilles’ heels when it comes to payments – real-time or otherwise – many other, newer blockchains – especially, so-called “Ethereum- killers” including Algorand, Cardano, Cosmos and Solana – are fast enough to be close to if not effectively real-time.

See: Blockchain series: What is Algorand? Blockchain secures transactions by spreading the wealth

The problem with crypto versions of RTP, Chopra said in a July 27 Reuters interview, is the risk of hacks, bugs and fraud. While he didn’t go beyond that, there are a couple of basic reasons for concern, all of which come back to two realities about the blockchain technology cryptocurrencies are built on.

First, transactions cannot be reversed. The only way to get a refund is for the recipient to initiate a separate transaction. There is not an intermediary such as a bank or card processor with the power to universally reverse a payment.

Also read: Crypto Basics Series: What is a blockchain and how does it work?

Second, crypto transactions are “pseudonymous” – meaning that while the details of the transaction are visible on a publicly accessible blockchain, the people behind those transactions can retain their anonymity.

See: Crypto Basics Series: Is Bitcoin Really Anonymous and How Can Law Enforcement Track It?

Apart from being another obstacle to refunds, chargebacks and the like, this brings with it know-your-customer (KYC) and anti-money laundering (AML) concerns.

Major technical advances in banks

Discussing concerns about crypto’s potential impact on real-time payments, Chopra pointed to Facebook’s failed Libra/Diem project, which would have created a stable coin tied to a basket of fiat currencies (rather than one, like the dollar or euro) that would has been immediately usable by its 2.3 billion users for local and cross-border transactions.

Chopra called this project, which immediately met with widespread opposition from central bankers, regulators and politicians around the world, a “wake-up call”, suggesting that non-stable digital assets used for real-time payments could be just as worrisome.

Also read: To win real-time payment battle, crypto must beat mainstream FIs, Woo regulators

One result of Facebook’s stablecoin scare was the rise of central bank digital currencies (CBDCs) like a digital dollar, which are now being studied or under development in more than 100 countries. They will likely be built on modern blockchains or very similar technology, thus enabling effectively real-time payments.

While banks have reacted with fear, with groups such as the Bank Policy Institute (BPI) saying that CBDCs could “undermine the commercial banking system in the United States”, other experts take a more convinced view.

“Central banks’ digital currencies are throwing a lifeline to the banks,” Co-Pierre Georg, who holds the South African Reserve Bank Chair in Financial Stability Studies at the University of Capetown, told PYMNTS recently. “The banks really have it backwards. They should be terrified of Big Tech.”

An adviser to the Algorand Foundation, a blockchain developer working on several CBDC projects, Georg added that Libra would have been as big a threat to banks as it was to central bankers.

Although Algorand is capable of real-time payments, he did not see crypto as a major threat in that regard — noting that the existing RTP systems work well, are cheap and reliable, and “have never failed as far as I know . “

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