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. Court case submitted v. The Consumer Financial Protection Bureau argued that new regulations introduced last year were arbitrary and capricious and put “innovation at risk.”

The lawsuit comes shortly after last year’s high-profile scandal in which a fintech startup called Yotta Savings managed to lose track 100 million dollars in customer funds. What consumers didn’t realize was that Yotta itself wasn’t technically a bank, meaning they didn’t have their own Yotta bank accounts and weren’t eligible for deposit insurance. An intermediary called Synapse, which sent Yotta deposits to real bank accounts, collapsed suddenly in May, and since then there has been finger-pointing back and forth, with neither side able to explain where the money went. Many customers have not yet recovered their funds.

That’s all to say, it’s rich that a bunch of tech lobby groups are now trying to fend off regulations that could hurt “innovation.” The new rules, which went into effect in December, allow the CFPB to monitor digital payment processors’ compliance with federal privacy and fraud laws through proactive inspections. Apps included in the rule include Apple Pay, Google Wallet, PayPal, Venmo and Cash App. The trade groups suing the law, NetChoice and TechNet, argued that the CFPB did not sufficiently identify risks to consumers or gaps in oversight to justify the rule.

The new lawsuit also comes after Block, the operator of the Cash App, agreed to pay $255 million to regulators who say the company violated banking laws, including by failing to protect against fraud. “Block the weak security protocols used by the Cash App and put its users at risk,” the CFPB said in exemption. “Although Block is required by law to investigate and resolve disputes regarding unauthorized transactions, the company’s investigations were woefully incomplete.”

Most average consumers do not understand the nuanced technical differences when dealing with various fintech startups. The CFPB warned that money held in accounts with apps like Venmo and Cash App may be insured by the FDIC, but only under certain circumstancesfor example if users request a debit card. Another popular financial technology company, Chime, offers FDIC insurance as customers get their own bank account. Services like Venmo and Yotta essentially pool each user’s money into a single custodial fund that doesn’t qualify for FDIC insurance.

This doesn’t even begin to mention all the problems with crypto, where wallet users have regularly been victims of attacks draining their accounts for doing something as minor as clicking a button by mistake. Cryptocurrency transactions are generally irreversible, meaning that once a Bitcoin leaves a wallet, it is gone forever. That is why North Korea has relied theft of digital currency to fund nuclear weapons development instead of traditional fiat currency, which is subject to strict anti-money laundering laws that would prevent large funds from moving easily.

But alas, President-elect Trump is all in on deregulation and crypto in particularso this lawsuit against the CFPB may not even be necessary in a few days.