Tech lobbyists are mad Feds want to regulate digital payment apps like banks

A pair of tech trade groups are suing the federal government over its attempts to regulate digital payment apps and wallets like banks. A lawsuit given v. the Consumer Financial Protection Bureau, arguing that the new rules introduced last year are arbitrary and capricious and “put innovation at risk.”

The legal action comes not long after last year’s high-profile scandal that derailed fintech startup Yotta Savings. 100 million dollars in customers’ funds. Users did not realize that Yotta itself was technically not a bank, meaning that they did not have their own bank account with Yotta and were not entitled to deposit insurance. Synapse, the intermediary that sent Yotta deposits to accounts at actual banks, suddenly collapsed in May, and since then there has been back-and-forth finger-pointing with neither side able to account for exactly where the money went. Lots of customers they still haven’t got their funds back. Yotta encouraged users to save by rewarding them with random cash prizes.

All that to say, a group of tech lobby groups are now trying to roll back regulation that could hurt “innovation.” The new rules, which took effect in December, allow the CFPB to monitor digital payment processors’ compliance with federal privacy and fraud laws through proactive examinations. Apps included in the rule include Apple Pay, Google Wallet, PayPal, Venmo and Cash App. The trade groups that filed suit against the law, NetChoice and TechNet, argue that the CFPB did not sufficiently identify consumer risks or oversight gaps to justify the rule.

The new lawsuit comes as Cash App operator Block agreed to pay $255 million to regulators who alleged the company violated banking laws, including inadequate fraud protection. “Block the weak security protocols used for the Cash App and put its users at risk,” the CFPB said. release. “Although Block is required by law to investigate and resolve disputes over unauthorized transactions, the company’s investigations were woefully incomplete.”

Most average consumers don’t understand the nuanced technical differences when dealing with various start-up financial technology companies. The CFPB warned that money held in accounts with apps like Venmo and Cash App may be FDIC-insured, but only under certain conditionsfor example, when users request a debit card. Another popular financial technology company, Chime, offers FDIC insurance because customers buy their own bank accounts. Services like Venmo and Yotta pool each user’s money into a custodial fund that is not eligible for FDIC insurance.

And that doesn’t even begin to mention all the problems with cryptocurrency, where wallet users regularly fall victim to attacks that drain their accounts because they did something as small as pressing a button by mistake. Cryptocurrency transactions are usually irreversible, meaning that once a bitcoin leaves a wallet, it is completely gone. That is why North Korea relied on it steal digital currency financing nuclear weapons development over traditional fiat currency subject to strict anti-money laundering laws that prevent the easy transfer of large sums of money.

Unfortunately, President-elect Trump is preventing everything from being regulated and especially cryptoso this lawsuit against the CFPB may not be necessary in a few days.