April 18, 2022

CRS Considers Policy Issues Raised by Digital Wallets

The Congressional Research Service ("CRS") reviewed digital wallets and policy issues arising out of their use.

CRS categorized the usage of digital wallets into three groups: (i) retail-specific digital wallets offered by a vendor to purchase its products; (ii) general purpose digital wallets used to facilitate payments broadly, rather than for a specific vendor; and (iii) cryptocurrency wallets. CRS noted that cryptocurrency wallets can be further subdivided into three types: (i) custodial wallets maintained by a third-party institution (e.g., a crypto exchange); (ii) non-custodial wallets not hosted by a third-party institution; and (iii) cold-storage wallets that "allow end users to store cryptocurrencies offline, a practice that shields them from hacking."

CRS explained that although digital wallets are not themselves accounts or payments, policy issues related to accounts and payments are raised by them. (In October 2021, CRS reported that the CFPB ordered major digital wallet offering companies to "submit information about their payment products to monitor risks to the public," which may portend rulemaking in this area.) The policy issues discussed include:

  1. concerns over data privacy and the disclosure of a user's nonpublic personal information to third parties; and
  2. concerns over consumer and investor protection, and whether users are under the false impression that their assets/funds stored in digital wallets are eligible for deposit insurance.

CRS recommended that policymakers consider expanding the protections provided by the Electronic Fund Transfer Act, which applies to some but not all mobile wallets, to cover any bank-based cryptocurrency products that are stored in digital wallets "or even potentially other cryptocurrencies in a bank-issued digital wallet." CRS also recommended that policymakers consider (i) safeguards to guarantee sufficient operational resilience of digital wallets, (ii) issues of systemic risk and (iii) market power given that digital wallets may provide technology companies "with an entree to offer consumers an expanding suite of financial services and products."

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