Digital currencies, such as Bitcoin and its underlying blockchain protocol, introduce a technical platform for a new global payment infrastructure that has the potential to level the playing field for the 2.5 billion people across the globe who are unbanked or underbanked. The immutable and distributed nature of digital currencies and a number of the platforms built on top of blockchain protocols can provide improved security, efficiency, affordability, privacy,
and transparency in financial transactions, as well as a whole host of other transfers of value or information. Furthermore, thanks to the proliferation of mobile devices, blockchain-based digital currencies can even remove the middleman, and serve as a bank in your pocket. However, fully removing a third party intermediary comes with significant risks, as there’s no one to call if you lose your private key (which functions as your password), break your hardware wallet (which acts as your digital vault), or want to dispute a payment because the goods you purchased are damaged (because digital currency transactions are irreversible). Like any other product, consumer protection must be at the forefront of the development and implementation of digital currency and blockchain-based financial services.
Over the last few years, policy makers and federal regulators have been advising the blockchain community to develop a set of best practices to address such consumer protection concerns. Several have even cautioned that government solutions may prove to be over-burdensome if the industry fails to demonstrate that it takes consumer protection seriously. This has the potential to diminish the benefits of blockchain technology and limit its ability to foster financial inclusion. Each year Consumers’ Research hosts a workshop in Bretton Woods, New Hampshire, in the spirit of the first such conference in 1944. The Bretton Woods 2016 conference brought together representatives from legislative, regulatory, and enforcement bodies, as well as a diverse array of fintech, traditional financial industry, and blockchain experts in order to tackle these consumer protection challenges collaboratively. Consumers’ Research, along with the help and expertise of its workshop participants, produced the first industry-led, self-regulatory consumer protection effort in the digital currency space.
The guiding principles document, “Consumer Protection in the Digital Economy” has four main components:
The State of Consumer Protection in the Financial Services Industry
This section identifies the assumptions from which current consumer protection models are derived – the first being that consumers must trust their money and information to third parties in order to participate in the formal economy and the second being that individual consumers are ill-equipped to assess the trustworthiness of third parties. It then describes how blockchain-based digital assets, such as bitcoin or a tokenized property title, challenge those assumptions. This section also identifies which types of digital currency entities the proposed guiding principles are meant for, and reviews the U.S. government entities that have released consumer advisories, taken enforcement actions, or developed rules regarding bitcoin, other digital currencies, and the entities utilizing digital currencies and assets.”
Consumer Bill of Rights & Guiding Principles
A consumer bill of rights and 14 parallel guiding principles address consumer protection challenges in terms of security, privacy, usability, and disclosures and liability. The bill of rights outlines the baseline “rights” of consumers along with the minimum standards needed to protect those rights. Furthermore, it encourages companies to uphold these guiding principles by implementing processes and detailed protocols that are well-suited to their unique business models, instead of prescribing a one-size-fits all set of mechanisms that may work for some businesses but not others.
Consumer Protection Challenges
This section examines the flaws, failures, and weaknesses of existing financial industry frameworks, as well as newer digital currency and distributed ledger products and services. Using a top down approach, this section identifies the problems faced by consumers using traditional financial services and digital currency or distributed ledger financial services, as well as the source of those problems – be it regulation, corruption, or bad design.
Working from the bottom up, this section recommended solutions to the problems posed in the previous section are offered, identifying which guiding principles address the various challenges faced by consumers.
Across the globe, policymakers and regulators that are prioritizing financial inclusion efforts, tend to achieve the most success in places where policy and regulatory environments protect consumers while fostering innovation and encouraging competition through “regulatory sandboxes.” As such, it’s urgent that the blockchain industry demonstrates that it takes consumer protection seriously in order to stave off regulation that hampers the value proposition of digital currencies and blockchain technologies. If the industry fails to take action to put consumers first, it is possible that government entities will take a reactionary and overzealous approach to solving issues as they arise.
We are already seeing U.S. regulators shoehorn some digital currency businesses into ill-fitting or inappropriate regulatory frameworks. For example, some state licensing regimes apply money transmitter laws to non-custodial blockchain businesses that do not have custody of or control the movement of digital currencies; rather, they manage and supply the infrastructure that enables other businesses or individuals to hold and move digital currencies. This harms American consumers, because these businesses cannot afford to operate in an environment that requires unnecessary licenses. Instead, these businesses seek safe harbor abroad, taking their innovations and product offerings with them.
Furthermore, no consumers are better off when the regulatory environments of states with strong institutions and effective rule of law are so cumbersome that businesses flee to states where consumer protection laws are paltry or unenforced. Thankfully, as blockchain businesses adopt consumer protection best practices, regulators may be encouraged to put down Maslow’s hammer and focus on offering light-touch regulation, only where necessary. This will give businesses the breathing room they need, and it will afford consumers greater access to these transformative technologies, along with the protections necessary to safeguard their meaningful participation.