SDNY accepts the argument that crypto is subject to the Electronic Funds Transfer Act/Regulation E | Cadwalader, Wickersham & Taft LLP

In an opinion and order issued on February 22, 2023, Judge Denise Cote of the Southern District of New York (“SDNY”) allowed class plaintiffs to survive a motion to dismiss and proceed against Uphold HQ, Inc. on a number of claims, including that cryptocurrency is subject to the Electronic Funds Transfer Act (“EFTA”) and Uphold failed to comply with the disclosure and other requirements of the EFTA.

The EFTA, which is implemented by Regulation E, 12 CFR 1005, is a consumer financial services act that applies to “electronic funds transfers.” Broadly speaking, electronic money transfers include all transactions that occur electronically other than wire transfers, from debit card transactions and credit card transactions to loading prepaid cards and sending money internationally. Judge Cote assumes that because Uphold can be seen as a financial institution under the EFTA and holds cryptocurrency funds on behalf of customers in accounts, the transfer of cryptocurrency can therefore be seen as an electronic money transfer. To date, as noted by Judge Cote, the Consumer Financial Protection Bureau (which is the agency responsible for interpreting the EFTA) (“CFPB”) has not ruled on whether the EFTA applies to cryptocurrency transfers because it is “continuing to analyze the nature of products or services related to virtual currencies.” 81 Fed. Reg. 83934, 83978-79 (Nov. 22, 2016). Cryptocurrency exchanges to date have not attempted to comply with the EFTA and its provisions in part because the Act and Regulation E fit imperfectly with the way cryptocurrency works. For example, the requirement that a financial institution reverse and refund a transaction upon finding that an unauthorized person caused transfers from a consumer’s account would not be possible with cryptocurrency because transactions cannot be reversed on the blockchain.

Although the Opinion and Order’s conclusion that cryptocurrency transfers are subject to the EFTA does not have the force of law, should the SDNY ultimately conclude in this case that cryptocurrency transfers are electronic funds transfers for EFTA purposes, a whole host of disclosures, error resolution protocols, and other requirements will apply to all exchanges that facilitate cryptocurrency transfers. Crypto and consumer protection enthusiasts alike will be watching this case closely.