[inaudible conversations] [inaudible conversations] >> come to order. without objection the chair is authorized to declare a re cess for the committee at anytime. entitled bureaucratic overreach for consumer protection. examining the cfpb's latest action to restrict composition in the payments. without objection all members have five legislative days to

submit extraneous materials for inclusion in the record. i want to recognize myself for five minutes to give an opening statement. today's hearing, bureaucratic overreach or consumer protection, examining the cfpb's latest action to restrict competition in payments in my view is critical because it's going to talk about this large participants in the general use of digital consumer payment applications market. this is the sixth lpr that the cfpb has initiated. and putting aside the egregiously short comment period which frustrates both members of this committee, the deeply flawed cost benefit analysis which are both have become hallmarks of this administration, i find the substance of the cfpb's proposal deeply concerning. the proposal asserts that companies that let you send moneys to friend, peer-to-peer,

are companies that keep your credit cards information on your phone somehow are in the exact same market. why? well, just because the cfpb says so. this breadth of the market, the cfpb's trying to define, has perplexed many on this committee from potentially covered to both sides of aisle here. many companies are utterly confused, whether the rule will be implemented and whether they're covered by it. i would say this is no accident. cfpb is trying to cast a wide a net as possible and become a technology regulator. in many more ways than one, this proposal marks is s departure from the cfpb's previous large participation rule. director chopra decided on a whim, in my view without

justification that technology companies pose a threat to consumers and this rule should be viewed as a thinly veiled work around to get cfpb supervision team into these tech companies. and that's because once an entity is designated as a large participant, the cfpb cannot only supervise the activities, which is what i think the intent of dodd-frank was, that originally qualify, but they can actually supervise the entities, business itself. the proposal attempts to establish limits by only capturing those companies with five million transactions within a year. so we'd love to hear from the panel on, is that a good number or a bad number? but don't be fooled this modest threshold is so low the agency will effectively have carte blanche to knock down the doors with their fleet of examiners.

in the payment space and leave consumers encumbered with fewer firms from which to choose a payment method. that decreases competition. this lpr doesn't benefit consumers or provide market clarity, in fact, the onl people this proposal potentially will benefit besides witnesses like you, are compliance lawyers. to further expand their authority to see if pb decided to capture digital assets as well. to see if the assertion of funds includes digital assets. this is a novel position and the cfpb justifies interpretation only in a small unassuming footnote. concerns around that is not particularly partisan. there were questions about the scope and implementation.

the cfpb needs to go back to the drawing board and work to protect consumers and not hinder innovation and not expand the cfpb's insatiable and scope. we appreciate your willingness to work with us. i now yieldo the ranking member, mr. lynch of massachusetts, five minutes for his opening comment. >> thank you, mr. chairman. and good morning. i'd also like to thank all of our witnesses today for your willingness to help the committee with its work. it is the fundamental mission of the consumer financial protection bureau to safeguard american consumers against unfair, deceptive and abusive financial practices and discrimination. the cfpb ensures that our markets are for consumer products and service operate fairly and efficiently in the interest of consumer access and responsible innovation. in furtherance of the critical

mandate cfpb recently proposed a rule as the chairman noted that will allow the agency to exercise supervisory authority over companies that offer digital wallets and payment services, peer-to-peer payment apps and electronic funds payment apps. unfortunately, this will place, apple, google, meta, other companies that moved into the financial services space on par with financial institutions that are already there and already subject to cfpb supervision. unlike large banks and credit unions, such of these companies do not currently undergo cfpb superry exams, periodic monitoring or compliance checks. they may not be required to ensure company funds or deposits. cfpb action in this area is timely, considering the escalation of shadow banking. that is the migration of core

banking activities, which traditionally fall outside of the banking regulations. and this is growing, given the employment of opaque technology. and they've reached 300 billion dollars and estimated to grow over 150% by 2028. moreover, an estimated two-thirds of all americans, including the majority of low to moderate income users are now relying on peer-to-peer digital payments, such as paypal and venmo, many have options. and it's not surprising that the consumer advocates strongly support the rules. according to the consumer federation of america, quote, we would be concerned whenever the line between congress and banking is committed to blur.

by closing this loophole they're moving forward to hold big check companies accountable to play by the rules as everyone else. i agree with that statement. the cfpb is not becoming a check regulator as much as check companies are becoming banks or are becoming involved in the conduct of banking. by subjecting large check companies to the same consumer privacy standards that apply to financial institutions under the federal graham act, protecting consumers against massive data collection and the monetization of the personal information. cfpb estimates that the proposed rule would only apply to 17 entities. the agency has also made clear that its supervision of nonbank institution is based on risk, size, and financial transaction volume, as well as the extent of state oversight. that is why the rule includes a threshold of five million payment transactions annually. i look forward to hearing from

our panel lists this morning and stake holders as this rule making process. thank you, mr. chairman, and i yield back the balance of my time. >> the gentleman yields back. we want to thank our witnesses for being here today and making the time. we are-- you'll be recognized for five minutes to give an oral testimony and without objection your written statements will be made part of the record. we recognize the testimony of mr. holtshowser, and james kim, industry group at troutman. and a financial technology policy analyst at the cato institute. and christopher, joe josephine

witt professor s. >> thank you, mr. chairman. chairman hill, ranking member lynch and members of the subcommittee and digital assets. financial technology and innovation, thank you for the opportunity to discuss the consumer financial protection bureau as rule on defining larger participants in the market. i'm executive of net tech, the technology ceo's and promotes the growth of the economy at the 50-state level. our diverse membership, businesses ranging from start-up to some of the most iconic companies on the planet. and we have employees in the field of technology, artificial intelligence, e-commerce, sharing the gig economies, advanced energy, transportation, cyber, venture capital and finance.

as you know, technology plays an important roles in removing barriers to access and empowering americans of all backgrounds to better manage their financial life through safe, secure, inclusive and reliable financial tools, including digital wallets and payment application. members support efforts by policy makers to adapt and update outdated laws and regulation to meet the growing demand from consumers and businesses for these innovative fintec products. it's highly diversified. companies across the eco system play a wide array of unique roles serving different markets and offering different functionality. and regulations focused on fintecs must make sure allowing this economy to flourish. fails to accomplish those

doles. under dodd-frank and the procedures act the bureau must conduct thorough due diligence before issuing a proposed rule. the cfpb falls well short of this requirement. frankly the lack of empirical analysis, underlying the proposed rule is stark and troubling. because they failed to follow rule making by congress the proposed rule creates an arbitrary market that's not based on data driven analysis or the reality of the eco payment system. and fails to identify consumer harms that would necessitate supervision and fails to adequately address the cost. the diversity of companies that can be for the supervision. we strongly feel that these deficiencies render the proposed rule defective. before moving forward, it's critical that the cfpb more precisely and narrowly define the consumer payments market in

which it seeks to supervise and conduct empirical analysis required in the rule making process. at a very basic level the bureau should complete a cost benefit analysis that adequately considers companies that may fall within the purview of the proposed rule. analyze the cost to the companies rather than using conservative estimates, and determine the cost may be the-- the cost that may be passed on to consumers. until the cfpb conducts the analysis required of it by law, tech net looks at the policy altogether and the rule in its entirety. otherwise this rule will introduce tremendous complexity and uncertainty into the digital payment markets to the detriment of consumers and businesses across our country. we appreciate the subcommittee's look at this important rule. >> thank you, you're recognized

for five minutes. >> thank you for holding this important hearing on the cfpb's proposed larger participant rule making. i'm brian johnson, managing director of potomac level partners, previously served as dew point director of the cfpb, prior to that i served on the financial services committee's previously staff. i will address my comments today first to the proposed rule and second to the broader context of recent cfpb action. as members are aware, congress gave the cfpb authority to subject so-called larger participants of defined markets for consumer financial products and services the supervisory examination. the proposed rule would, if finalized, define a market for general use digital consumer payment applications. larger participants of this market defined as providers of at least the annual payment

transactions small business concerns, would be subject to cfpb exam. there are several reasons for members on a bipartisan basis to encourage the cfpb to withdraw and repropose its rule so it may-- so that it may engage in a more thoughtful deliberatie process. the remarks are the impetus for the proposed rule concerns for big tech companies to engage in various anti-competitive practices. however, the cfpb is not the proper agency to address such concerns. cfpb supervisory duty is for financial law not anti-trust law. proposed rule lacks adequate justification, because it's not grounded in consumer financial risks arising from the offering or use of covered products and services within the defined market. second, the dodd-frank act

provides the cfpb with no intelligible principle to guide its definition of markets or selection of larger participants. rather, it gives the cfpb carte blanche to expand its own supervisory reach. this violates nondelegation principles. congress should define the cfpb's authority and not the cfpb itself. third, the proposed market definition is really broad because it aggregates terms rather than describe a coherent market for reasonably interchangeable financial products and services. fourth, the cfpb intemperatures the term funds to cover digital assets. the effect of which would be to expand its regulatory authority over a large number of new products and participants. this would up end careful efforts by members of congress to craft a balanced legislative framework for digital asset regulation. this presents a major question

of economic and political significance that must be left to congress to decide. fifth, the cfpb's cost benefit analysis uses a decade old frame work to calculate the expected cost to the examination. in my view, the bureau's exam understates the true cost of an example by at least an order of magnitude. the cfpb's failure to update its assumptions and obtain accurate information is a significant weakness in the proposal's 1022 analysis. finally, without good cause shown, the cfpb departed from its standard practice in order to limit the amount of time for the public to submit comments on the rule which is contrary to the spirit. >> now the cfpb action. regarding the consequences, i note that cfpb sometimes require institutions to waive

attorney-client privilege and turn over communication. the supreme court long held that they cannot compel this information without authorization of congress, which the cfpb does not have. which is detrimental to consumers. also cfpb,ike occ or sec, does not publish an annual list of exam priorities. as a result institutions have comparatively less insight into the cfpb's prioritization of compliance risks and therefore, less opportunity to proactively address them. regarding rule making, recently proposed or finalizes several rules on so-called junk fees as part of a campaign to scapegoat companies for rising prices caused by inflation. the price controls depart from the traditional federal approach to consumer finance regulation the politicized credit and capital unwarranted

market, a danger to free markets and consumer autonomy. this is not consumer protection. i urge congress to use all available means to prevent bureaucratic central planning and overreach. thank you, and i welcome the opportunity to answer your question. >> thank you very much. mr. kim, you're recognized for five minutes. >> chairman hill, ranking member lynch and members of the subcommittee. thank you for inviting me to testify today. my name is james kim. i'm a partner at the law firm pepper hamilton sanders. i'm presenting my views and not those of the firm or any client. firm. my testimony and the views i express today are informeded by my tenure at the cfpb and subsequent practice focusing on payments and technology. my clients at trout and pepper range from banks and other established institution to medium size and early stage

companies seeking to introduce innovative products and expand choices for consumers in the marketplace. from 2012 through 2014, i had the privilege of serving at the cfpb where i was the lead attorney in the bureau's first enforcement action by mobile devices and payments. i also work with colleagues in the office of supervision and supported examination. and i was a member of an interdepartmental working group focusing on emerging payment products, and since leaving the bureau, my practice very much focuses on helping companies navigate examinations, investigations, and rule makings involving an agency. so why is the proposed rule for defining larger participants in the payment space important? before i answer, it's worth highlighting that there is no question that consumer payments

are currently regulated by a host of federal and state laws and rules that are enforced by a combination of the cfpb, federal prudential regulators, the federal trade commission, sinfen and agencies. it does not change the mayor yad of the regulations, instead the proposed rule is important because it seeks the larger participants on the supervisory authority. the bureau's power to examine institutions is the agency's most powerful and least transparent tool. companies supervised by the cfpb must devote personnel and significant resources to host examiners at their offices, respond to information requests and follow-up questions and address findings. examinations are nonpublic and often last months and sometimes

longer than a year. the cfpb typically extends the heir exams to the company's parent, affiliated entities and other business areas beyond the covered activity, in this case, general use payment application. examinations lack a third party, such an a court or an administrative law judge to oversee the process and adjudicate disputes. companies also forfeit their attorney-client privilege during the exams. with these considerations in mind, congress carefully defined the cfpb supervisory authority by generally limiting supervision to larger banks and larger nonbanks who can bear the significant cost of complying with exams. and congress also mandated requirements before the bureau can expand the scope of its own authority to the larger participant rule making. i'm going to just highlight

two issues. first is require making in dodd-frank and existing supervision by federal prudential regulators and state agencies. dodd-frank lays out the requirement for larger participant rule and before issuing such a rule, the bureau must consult with the federal trade commission. that requirement is critical because defining a market is the fundamental pre-requisite to determining who the larger participant within the market. the ftc analyzes market concentration and enforces anti-trust laws and therefore dodd-frank requires the cfpb to consult with the ftc. now, the proposed rule states that the cfpb consulted or provided an opportunity for consultation and input with not only the ftc, but other federal agencies, but it doesn't discuss any input from the ftc or any factors determining which products or services

should be included within the same market. it's therefore, unclear whether the bureau met the statutory obligation to meet with the ftc that the bureau shall consult with its sister agency. now, turning to duplicative supervision by state and other federal agencies. the proposed rule would create duplicative and overlapping supervision for many companies in the space. the proposed rule mentions that states have supervisory programs, but ignores many companies subject to the rule and partnered with a financial institution who are already supervised and subject to examination by the cfpb or the bank's prudential regulators under the bank's service company act. >> mr. kim, you've gone over your time. your full statement will be in .

>> thank you, sir. >> thank you, of course. you're recognized for minutes. >> good morning. chairman hill, ranking member lynch and distinguished members of the consumer financial protection bureau and inclusion. thank you for being able to take part in this hour. i'm a policy analyst at cato institute center for monetary and financial alternatives. the views that i express today in my testimony are my own. consumer financial protection bureau for providing supervised payment app, for reasons laid out in my testimony, it should be withdrawn. since the launch of the first payment app these tools have been highly successful satisfying demand. the cfpb explains this well. more than 9 in 10 u.s. consumers report a digital

payment method and reports of digital payment app. in recent years, cryptocurrency or defi keep the united states at the technology frontier. the first payment tool to benefit entrepreneurs and consumers. unfortunately the cfpb's larger participant rule takes the utility and popularity of digital payment tools as the reason to subject them to greater scrutiny. it would target market success, not market failure. the cfpb does not identify specific risk to consumers from digital payment apps, rather, vague references to generic risk leave without a justification and also create uncertainty, as when the bureau indicates its supervision priorities will be tied to unpredictable factors. unclear rationals and

authorities provide little practice cal guidance. given the shortcomings, the bureau should withdraw the proposed rule. even if it were justified, it would present multiple problems over cryptocurrency. the problem begins when they interpret the term funds to cover crypto. as the bureau acknowledges, funds is not specifically defined in the consumer financial protection act. and it's not clear that the original public meaning of funds under that act included cryptocurrency. the actt of legislation designed to address the 2007 to 2008 global financial crisis, an event pre-dating the crypto coin transfer. that it can place in 2009, just prior to the act passage. and another major cryptocurrency would not launch until 2015. as the cfpb acknowledges, the case law the bureau cites to

support its interpretation does not address the consumer protection act, but other laws. asserting jurisdiction over crypto asserts different issues. the lack of clarity of key terms in the rule, misstating current crypto tools like other fintec tools. specifically, treating what are self-hosted or noncrypto wallets as if they were the same as digital payment apps would be inappropriate. unlike payment apps where users rely on service providers, self-hosted crypto wallets are simply tools that let users protect the unique cryptographic keys for their own crypto holdings. importantly, these are not held or documented by self-hosted crypto wallet creators, rather, they are recorded on public block chain ledgers that operate independently. the proposed rule when it comes

to these technologies. the bureau does not analyze the specific costs and impact over cryptocurrency or self-hosted crypto wallets. applying the proposed rule to them would raise serious concerns under the administrative procedure act and the consumer financial protection act itself. while there are good reasons that the proposed rule should not be read to cover self-hosted crypto wallets, if the proposal were to proceed, the bureau must expressly clarify that the bureau does not apply to these tools. notedly, the bureau attempt over crypto conflicts with the work of congress and this subcommittee in particular to define that jurisdiction. for the long-term health of both the fintec eco system and the constitutional order, congress, not administrative agencies should define the limits of regulatory authority. thank you for the opportunity to provide this information and i welcome any questions you may

have. >> thank you. professor, you're recognized for five minutes for your oral remarks. >> thank you, good morning. chairman hill, ranking member lynch and members of the subcommittee. thank you for having me to testify today. i'm a law professor at the university of iowa whereof teach and write in consumer law, consumer finance, digital finance and regulation. i'd like to make three points regarding the nonbank payments market as well as the cfpb's larger participant rule. first, as an initial matter. the cfpb supervision of nonbank payment platforms would help regulate the playing field between those platforms and banks. and the need for levelling that regulatory playing field has to do with the fact that both banks and nonbanks are playing similar roles in the payment's eco system. to be sure, we know that banks have long held a central role in the payment system and as such are highly regulated institutions and a critical aspect of their regulation is

supervision. nonbank payment platforms are acting as powerful intermediate arearies, helping consumers transfer funds as well as transactions between consumers and merchants. when they do, they add additional parties and legs in the payment process and that has the effect of increasing the chances for losses related to fraud, data breaches, and the insolvency of these powerful intermediintermediarie to be sure, in order to engage in the transition of money, one must obtain a license from various state regulators. the requirements relative to obtaining the licenses and the degree of oversight and supervision can vary amongst the states. among the back drop, the proposal to establish a more coherent supervisory framework over banks and nonbanks

prevent the invasion of consumer finance laws and assure compliance across entities that are offering similar services, in this case, payment services. secondly, another compelling reason favoring the supervision over nonbank payment platforms has to do with their collection, use and maintenance of important and sensitive consumer financial data. as big tech companies increasingly penetrate the payments market. a major incentive appears to be gaining access of an important and valuable information about how consumers spend money. this notion, alliance, i think, very well with the tech industry's data driven advertising centered business models that really thrive on harvesting consumer data. but by these firms also operating payment transmission lines, that allows them to amass personalized financial data, which they can then integrate with their existing

stock piles of data to create granular, multi-dimensional consumer profiles and those very multi-dimensional profiles can be exploited by these platforms, as well as sold to third persons and i think to that end, perhaps more alarming, these in depth consumer profiles can be used for discrimty purposes, such as unlawful, differential pricing and targeted marketing. of course, there's already a long history of discrimination against black and latino households and women in u.s. credit markets. to put it bluntly, i think a lack of the cfpb's supervisory authority over nonbanks in the payment system, is and has been a glaring blind spot for that agency and establishing extending in this area helps remediate that blind spot and establish more consumer trust in the system.

thirdly, and lastly, the inclusion of some form or some type of crypto companies is much needed when it comes to cfpb supervision. these are often entwined with finance, but little is known by their intricate and opaque operations. and right now that we're finding anything how they actually operate and in fact, take for instance, the high profile collapse of the crypto exchange giant ftx. it's exposed, i think, how little was professional known about the true nature of the transactions and handling of consumer assets. lastly, i'll note that extending cfpb supervision over at least some crypto firms is not just good for consumers, it's also good for other crypto firms. so, while robust supervision can help detect and deter

consumer fraud before it happens, it will also drive bad players from the market. so, in conclusion, we jumped generations in the payment system just over the few years of the pandemic. and the cfpb's rule making in that regard is sorely needed. i think it is well-aligned with safeguarding american households, as well as maintaining a secure and competitive payment landscape. indeed, given these platforms amidst growth, this role is long overdue. thank you. >> the gentleman yields back, thank you our panel for your excellent testimony. and we have the privilege of the ranking member for the full committee, maxine waters, and i yield for one minute. >> thank you, mr. chairman. i've long raised concerns about big tech's expansion into financial services. and i'm pleased that they've finally taken action to oversee these companies.

big tech already dominates markets, possesses massive amounts of consumer data. but it's not been subject to the cfpb supervision, and the banks and other financial institutions already follow. when i was chair, this committee held big tech to an account, include convening a hearing by facebook ceo mark zuckerberg over his plans to develop a cryptocurrency called-- when democrats led the dodd-frank act, we empowered the cfpb to supervise any large non-bank including big tech. when they facilitate payments or offer financial products to consumers to ensure that consumers are an always protected no matter who they're dealing with, i'm pleased they're using these tools as

intended and i look forward to today's discussion. and i yield back. >> the gentle woman yields back. recognize myself for initial questions. in my understanding, the cfpb since it was created 13 years ago talked about as the ranking member said for the past 13 committees about its legal authorities under dodd-frank and constitutional funding structure. because the cfpb often asserts its authorities broadly, it's important for congress to be a for the larger participant rule makings like this one, defining a market is a prerequisite to determine what companies are, in fact, larger participants. it's really important for an lpr to set a narrow and clearly defined market because it allows the cfpb to subject nonranked consumer companies to its full supervision as i said

in my opening statement. not just about the product regulation, it opens those companies designated for full supervision and examination. even if they're not statutorily enumerated. however, i've got concerns about the bureau as chosen to set an overly broad and unclearly defined market in this rule over companies in the, quote, general use digital consumer payment application phase, closed quote. legal precedent in the anti-trust laws look at the same market if they're reasonably interchangeable by consumers for the same purposes, this matters because the cfpb is supposed to consult with the ftc when defining the market. and it's unclear from testimony today. if in fact the cfpb met its obligation to do so. in contrast, this atto sweep in practically the entire payment's eco system by relying on the definition of general use and thus it's overly broad

and ambiguous. mr. holhowser does tech net view this as the same market, peer-to-peer, access to digital payments, are they part of the same market? >> no, general use is not a part of the market, that's conflation of a lot of products and es. >> does the cfpb's overly abroad approach and unclear test test test test test test test test test

to compete. >> interesting. mr. johnson on that point, i think master card might do 160 billion transactions a year, so in the payment space, the numbers are in the billions when it comes to consumer payment transactions, would be my judgment, but you were at the cfpb. do you have any perspective on the five million number as being way too small or, you know, is it a goldilocks number or not a right number? >> well, chairman, i would say the onus is on the bureau why that's the correct figure. >> do they do that? >> i think they've failed-- >> what is on this topic? >> putting the finger in the wind and seeing which direction it blows. i believe the justification provided by the bureau is inadequate and you know, one

pressure to look at to your question about market definitions, in each of the larger rules that the cfpb proposed, it's very easy, was very easy for the bureau to actually define the markets, it took two to three pages in the definitions. here just as a metric, they've struggled for seven pages in the federal register to try to define this market and i think that speaks volumes about the struggle the agencies have undertaken. >> that's helpful and then let me ask you this, again, based on your experience, should the lpr process be statutorily reformed? should we direct the cfpb exactly how to propose an lpr? and provide more definition instead of this fishing expedition in addition to the collection rule in 2012, the auto financing rule 2015 to your point they were very specific. this seems overly broad. >> at a minimum, congress ought

to provide an intelligible principle for them to follow, including the rules, that could include a list of statutory factors for setting a market definition and for setting the manner in which it establishes-- >> thank you, my time expired. thank you. if you have further on that or anyone else, please submit it for the record. without objection i'd like to propose that some letters be inserted into the record. letters to director chopra. january 30th to director chopra from chairman mchenry, myself and mr. flood and a letter dated january 15th from democratic members mr. andic, et al. stated january 5th. without objection they will be included in our record. and now we turn to the ranking member mr. lynch from massachusetts for five minutes. >> that you, mr. chair, and

again thank the witnesses. professor, i was here when we created the cfpb. i was here during that debate and the goal here and the statutory direction of the cfpb, we were trying to provide a single point of accountability for enforcing financial consumer financial laws and protecting consumers in the financial marketplace. why would-- why would this proposed rule be outside of the regulatory framework that we set up for the cfpb? this is exactly in my mind, this is exactly what we created the cfpb for. we understood even back then, not that long ago, that technology was changing. we understood that. so we didn't, we didn't put limitations on technology for the cfpb. we said protect consumers in

the financial marketplace. full stop. full stop. so now technology companies are getting into the financial marketplace in a big, big way, 300 billion dollars so far in you know, peer-to-peer apps and other platforms. so, why-- would not be--why the cfpb that would not be in the legitimate purview of their regulatory mission? >> thank you for the question. i think that regulating the space is absolutely within the cfpb's jurisdiction and i view it not so much as the cfpb trying to regulate tech firms, but as the cfpb exercising its authority as directed by congress to regulate and in this case to supervise nondepository institutions and nonbanks. it just so happens that these nonbanks often bill themselves as tech firms or term financial

tech technologyes or fintec companies. and the point about digital payment firms having to abide by the same laws electronic funds transfer act and not in the same way that banks do with respect to supervision, i think, really accentuates a divide between banks and nonbanks or shadow banks and banks, which remains an issue, even after the 2008crisis. i think we saw this most significantly in the run-up to that crisis where banks chartered institutions were subject to one set of rules and nonbanks, which was largely the engine of subprime lending were not and i think it's worth saying what i mean by not subject to the same set of rules and it's really along two dimensions, first, they don't have the same sort of safety and soundness requirements that banks have. the result is that their business models can be used-- can come in a form that

requires very view reserves, also, very thin margins, which makes them vulnerable to shock, which in turn can trickle down to consumer harm. and then supervision being the other side of that, these firms generally, well, they have to abide by the same rules, they're not subject to the same monitoring-- >> i've got to jump in here, no, i appreciate that. so, i've heard from other witnesses that there's no risk-based foundation for the cfpb to act, but of the 24,000 cryptocurrencies that have been launched, over half, 14,000 have died. so, people have lost their investment completely, those cryptocurrencies have gone dead, gone to sorry. so, we know there's an abundance-- never mind ftx, mixon, terra, pay connect, bitcoin, all gone to zero. there's a huge amount of risk and volatility in that and some

would say there's no risk-based reason for cfpb to venture into this. let me just ask you the last question. if i set up a banking system that has all of the bells and whistles, all of the banking regulations for one group and then i create another one that has no regulations, completely unregulated, what-- where is the money going to migrate in your estimation? where will the money migrate and the financial activity migrate to? the heavily regulated one that protects consumers or the fintec area with no regulation? >> i think quite simply, it will migrate over to the nonbank area because there are lower regulatory burdens in that space. but, the trade-off there is that there can be more consumer harm in that space because there is less watching of the players in that market. >> thank you.

i yield back. >> the gentleman yields back. >> mr. lucas of oklahoma is recognized for five minutes. >> thank you, mr. chairman. the u.s. banking sector is among the most highly regulated sectors in the country and in 2010, the passage of dodd-frank with 2000 sweeping pages across the industry. and dodd-frank established the cfpb, giving the new regulators authority over banks and nonbanks. part of this was supervision over the larger participants in consumer markets. cfpb's proposed larger participant rule from t november is the sixth rule in this category. this time aimed at digital consumer payments applications. this rule would allow the cfpb to supervise certain nonbanks that provide money transfer to consumers. you discussed in your testimony

how cfpb does not follow the administrative procedure act. can you expand on that? that's one of the fundamental issues. playing by the rules. >> well, there's the statutory rule making process that has to be followed, including plenty of time for respondents. i think that 60 responses were heard in this case and really was 41 days if you include the holidays was supposed to be 60. they have to provide justification of consumer harm and a reason why they need to do this and they need to explain who is going regulated and how it's going to happen for a response, just to quickly answer so you can have it back. that's in and of itself not sufficient. >> mr. kim, this isn >> mr. kim, this isn't new for cfpb. could you highlight the importance of a robust administrative procedures act process? >> why does it matter?

>> it matters because the agency does have a lot of power. in order to exercise its power, it should follow its statutory mandatrank another ask but primarily there. so i think, you know, in order to have the right balance of executing its mission to protect consumers, exercising its broad regulatory powers, it has to follow the mandate from congress. >> there has been a significant amount of questions regarding the details of the rule. for example, cfpb doesn't clear there are concerns that this could rope in entities that transfer assets such as securities or commodities that are outside the purpose of this ruling. could you explain how elements in the proposal such as this are overly broad? >> so dodd-frank has a specific

requirement where, really, i think boundaries is a better word. it says very clearly that the jurisdiction of the cfpb ends where the sec and the cfpb begins. i think it is pretty clear that those two sister agencies have been very active in the digital assets and crypto space. the bureau should, i think, respect and recognize the jurisdiction and the effort and the investment by those agencies and congress in the digital assets space. >> mr. johnson, could you offer your perspective on the far- reaching nature of the proposal? this have long-term impacts. >> yes, congressman. it does have long-term impacts. i think the impacts will manifest over time due to the

confidential nature of the supervisory process. so an overbroad market definition, and imprecise establishment of the asset threshold for determining larger participants mean that an unknown number of institutions will be subject to supervision is a confidential process. the public won't understand what the bureau does behind the scenes afterwards. risk. k that is the prim >> focusing in on the requirements of the proposal, do they require any specific examination procedures that often participants cover in overpayment services? please give us a sense what details the cfpb lays out in my remaining time. >> the only reference i am aware of is the general statutory requirement that the supervisory process itself be risk-based and notably the rule is not risk-based and the bureau's determination of the market and institution subject to the proposed rule is not risk-based. >> with that, my time is expiring and i yield back.

>> ms. waters is recognized for questions for five minutes. thank you, very much. the misleading title of this hearing suggests that the larger participant rule of the cfpb would restrict competition and payment. but, if anything, this rule should increase competition by ensuring that the largest companies are not able to leverage their size and data to unfairly crowd out smaller companies. this is a concern because some of these big tech companies don't have the best record when it comes to consumer protection. meta, for example, has engaged in illegal data practices and has been a repeat offender of regulatory orders highlighting the importance of supervisory authority in this space. can you talk about how this rule would help smaller

companies by keeping the biggest companies in check?'s >> thank you for the question. i agree with you that market dominance is a real concern in the non-bank payment space. the dominance and concentration of the consumers market by a handful of companies poses, i think, some significant dangers. we know when a small number control the majority of the market, that limits competition and leads to higher prices and reduced innovation. also, lower income households facing financial constraints may be more impacted by having fewer alternatives. and they are more vulnerable to those price increases. also, market dominance can stifle diversity in the consumer payment space by limiting access to services that are more tailored to the needs of specific demographic groups. i see this rule as being in service to addressing that market concentration. so to give you an example, the

cfpb with supervision authority in this space, could monitor instances of unfair acts and deceptive acts and practices by non- bank payment firms that makefficult for consumers to untangle themselves from their payment account relationship and thus move on to other providers that may be more optimal for their uses. >> thank you, professor. can you speak to the broader concerns about the potential for monopolistic use of data and power and misuse of that power that big tech companies have? how concentrated is the market for payments currently, and what risk do you foresee in the absence of enhanced supervision by the cfpb under its new proposed rule? >> some of the empirical data right now indicates a vast majority of you as households use just a few of the major payment platforms. i think i saw 56% of united states adults use paypal and

then mow. that is a great deal of concentration and i think that level and the way in which it generates very sensitive consumer financial data raises really significant concerns and particularly relative to privacy. i think this rule is animated by that concern and we do know that major tech companies build their business models around a large collection and analysis of user data like browsing history and social interactions and search inquiries. having this payment information helps build even larger stockpiles of data about consumers which is held by just a few companies and it can be very powerful. as i said earlier in my remarks,

unlawful price differentials as well as targeted marketing. >> thank you so much. mr. chairman and members, i served on one of the conference committees of the dodd-frank. i was so happy that the consumers finally had an agency dedicated to taking care of their concerns. mr. hill has said it has been controversial. it is controversial because the opposite side of the aisle didn't like the idea that the consumers were now going to have influence and power. so i'm very thankful for the hearing. although it is entitled in a misleading way. this helps bring out what the cfpb is responsible for and doing. it doesn't continue to have to take certain kind of criticism from the opposite side of the aisle. who never likes the consumer protection bureau. thank you. i yield back. >> the gentlewoman yields back. >> thank you and thank you for witnesses for being here with us today. recently i was made aware on february 23 of 2024 and my

birth day and it is been linked to financial protection bureau that a company had made a decision to challenge an order that sought to establish supervisory authority based on risk determination and the director has described the agency's authority as the ability to decide that a company is risky and subjected to supervision through statutory authority. mr. johnson, are there any meaningful considerations that cfpb is required to make to determine a company is risky? or has cfpb set this up as an arbitrary process where they have near unlimited discretion? >> the standard of evidence that the bureau has established is procedural and low. and the real problem here is

that the bureau changed its procedural rules to make nonpublic confidential processes associated with the supervision of institutions public in one instance and in that instance only. that is where the company challenges the proposed determination. this creates leverage for the agency to say, we want to supervise you. if you fight us on this, we are going to publicly name you as how to challenge that proposed designation and subject you to, among other things, class actions and reputational harm. >> what are the factors that they proposed the use of the non-bank covered person would be included in the general use digital consumer payment application space? is it whether they provide at least 5 million covered transactions annually. several market participants have indicated that this threshold is alarmingly low. mr. holshouser, would you describe the potential market impact if the cfpb categorizes

these entities with such a small market share is larger participants? >> so the minimum 5 million transactions is alarmingly low. if you think about just some of the small to medium-sized businesses having tens, if not hundreds of thousands a day, that threshold is so low that it is obvious it is an attempt to increase the purview of oversight of the transit team, which will, as i said earlier, have an outsized effect on startups of small and medium companies were trying to innovate and grow and affect them disproportionately. >> mr. kim, how is the cfpb historically determined thresholds for identifying entities to be considered larger participants under the larger participant rulemaking? >> in the past, they have conducted, you know, databased

research that is specific to a very well-defined market. so there hasn't been, i think, today. for example with credit reporting, that is a very well- defined market. i don't think there was a lot of discussion or uncertainty about what is large and that market. it is the same for a lot of the other lpr's. today's hearing i think highlights the uncertainty with this particular lpr. >> in your view, did cfpb conduct significant analysis to arrive at the threshold in the proposal? >> i don't see it in the proposed rule. i can't tell you what their basis was for 5 million. i can say that very anecdotally, there are, as was said by mr. holshouser, smaller to midsize to payment companies that would easily meet that threshold within a matter of months. >> shifting gears a bit.

mr. johnson, in addition to the larger participant rulemaking, the consumer cfpb is trying to create a non-bank registry and i signed a letter that my colleague led in may of last year highlighting our concerns with these actions by the cfpb. they have justified the need for a costly registration system where non-bank companies self-report public orders like enforcement actions or consent orders so consumers can be on the lookout for repeat offenders. mr. johnson, isn't this already public? >> it is and in other aspects of that proposed rulemaking are equally troubling. >> i yield back. >> mr. sherman of california for five minutes.

>> i also would like to criticize the cfpb. it has taken them over a decade to come up with a rule defining who would be subject to some future role. and consumers need the protection now. we may get it in several more years. in this initial pre-roll, it is long past due. i have been in this town for a long time. and i have snuck in once to lobby 101 secret classes. the rule is very simple, but the teaching is simple. if the facts are on your side, argue the facts. if you are on the side of good public policy, argue the public policy. if the facts are against you and the public policy is against you, argue the procedure. and that is mostly what we have here. it is people telling us that the procedure is somehow lost. the most extreme of those arguments is to have the cryptocurrency industry come in

and say how god-awful outrageous it is that somebody would treat crypto as a currency. if you aspire to be a currency, you should aspire to be regulated like a currency. and like our ranking member, like the ranking member of the subcommittee, i was here for dodd-frank. i can assure you that when we send funds we meant currently anything that qualifies as a currency. banks have long -- i have not really enjoyed the community reinvestment act -- and so high- tech companies have decided to say, if we can be of bank but caller selves fin tech we don't of the live with the community investment act or the host of others. paypal is holding onto i think it is about $18 billion of

customer money. and i do assume they invested as they will and maybe safe investments and maybe speculation. if they do go bankrupt, does the fdic reimburse the customers? >> thank you for the question and the simple answer is no. those customers are holding their funds with the relationship only to that non- bank intermediary. >> it is like loaning money to your brother-in-law? >> yes. >> i will ask representing technet if one of your members goes bankrupt, will the other members ship in and make the customers hold, or will those customers or voters be here demanding that congress build amount? >> it depends on what side you are speaking of.

and the other is zero liability for credit and debit but there is some exposure. >> right now they are holding onto $18 billion and investing it in either something safe or maybe pork bellies. i don't know where they put their money. wherever they put it they could put it somewhere more risky tomorrow. and your members won't bail them out and they will be here demanding a bailout from congress. i will point out that the deal with venmo is you pay 1.75% to get your money three days earlier. i don't think apr is really the way you should evaluate this. but for those of you who are fans of annual percentage rate, that's charging the consumer 213% annual percentage rate. yes it is only 1.75%, but that is just for three days and set up for 365 days. so we have a situation.

i can't think of any other situation where ordinary americans put their money in a financial institution that is totally unregulated, allowed to invest their money and pork bellies, or loose coin or whatever they want, and they have no insurance. can you think of any other place where millions of americans have their money at that kind of risk where they deposit their money and they think it is there? >> no. nothing comes to mind. to your point, i think the real danger of the way consumers interact with none bank payment platforms is that they do so under the misperception that when they do they enjoy the same sort of regulatory protection they have when you

deal with the broker dealer and they invest in securities or deposit accounts when they deal with banks. this is manifestly not the case. >> thank you. >> the gentleman's time is expired. ms. davidson is recognized provide -- for five minutes. >> i think it is great we are having this hearing and i think it is important to address the growth of government and it seems like the government expands every year and we do have one party that campaigns on a smaller government and we aren't doing so well and every year in every congress to get more government and one of the guaranteed to grow forms of government was the consumer protection bureau and it was important i think and we have multiple ways to try to address that. one of the things that is important is that we get the right kind of government where ever we have it is that participation. in the most recent proposal for more government by the cfpb,

they state they don't have to demonstrate that any customer harm has even occurred. could you explain what the bare minimum cfpb has to show to bring an entity under its supervision? >> a statute and talking about dodd-frank requires cost- benefit and risk analysis. so identifying, number one, a market that is right for supervision, it should identify risk to consumers in that market. that is what i see lacking in the rule. >> thank you. i guess cost-benefit may not overtly address harm, but it seems like there is always a case that we need more government. one of the footnotes that cfpb tucked into their proposal, many believe, would give the bureau supervisory authority and division within the company , outside the scope of the proposal. what is the practical impact,

mr. johnson, of including that wide sweeping statement in their proposal? >> congressman, i think you are referring to a statement where the bureau says that if an institution qualifies as a larger participant within a defined market, cfpb not only achieve supervisor authority but can examine for that product line that drew it in as a larger participant but it can thereafter and forever more examine the institution for any other product line that could be a covered product or service. i think that expansive view of the authority of the bureau is contrary to the specific process that congress established for identifying a larger participant within a specific market. >> thank you for that clarification. it's the hook that allows kind of more spread. i think a lot of times governments sort of, like it is an invasive plant. once it gets in a field, it

just keeps growing. the only way to get it out is to to get up by the root and branch. if it is doing something useful, at least you have to prune it to make sure it doesn't overtake everything else. i think companies define themselves under regulatory scrutiny are frustrated because there seems to be no satisfaction of the amount of regulation. there is always a more and that is particularly true in the digital asset space. we have seen digital asset companies come to the cfpb saying , or come to the sec in particular saying please regulate us. we want clarity. we are happy to cooperate with you. what do you need to know? and they share endless information. and they never get an answer. it is like hotel california in a sort of way. you can never check out or never leave. so, mr. solowey, can you

highlight the challenge that digital asset companies confront cfpb trying to put hooks into them and in a regulatory environment where in no other part of the economy where they are getting real clarity. >> i agree. i think the lack of regulatory clarity in this space presents a real problem for market participants there. it is my view that the proposed rule only muddies the waters here. not only does the lack of risk- based justification make the rule are justified -- unjustified but it also leaves other markets in the dark regarding how they are prioritizing the compliance or whether they are even covered by the proposed rule. >> yes. thank you. i hope we do what our committee set out to do which is to provide that clarity. we passed it in 21 and we passed

a ban on digital currency and we passed stable coin legislation and we importantly protected the right of self custody. are there any concerns that the approach of the cfpb threaten self custody? one of the most important protections we found as companies may haven't flourished, they have had problems. some have failed. users have been harmed notably by ftx. is self custody a way to protect yourself? >> it would address the risk that ftx presented. and the proposed rule lack of clarity regarding whether these technologies are covered only makes it harder for developers and users to deploy that technology given the regulatory uncertainty. >> thank you. my time is expired. >> we turn to the gentleman from texas for five minutes. thank you, mr. chairman. i think the ranking member and witnesses as well. mr. odinet, they recently submitted a statement for the senate banking committee outlining how the scale of

payment fraud a sizable and increasing, including payment apps. the statement indicated that reported 100 million and authorize -- unauthorized transactions on cash app and 57 million on venmo in 2022 alone. how with the cfpb proposed rule will it help to alleviate the amount of payment fraud in the market? >> so with respect to fraud, specifically, when the cfpb has supervision over a firm, it conducts regular examinations to make sure there is compliance with stringent guidelines. and in this case related to electronic funds transfer act obligations or account fraud. usually, the aim is to make sure the company is fortifying itself with consumer protection measures as well as trying to thwart consumer fraud before it

happens. so the bureau can closely monitor compliance with these apps to make sure payment companies have, for instance, robust dispute resolution mechanisms as well as disclosures. and the bureau can also assess a company's risk assessment strategies. the bureau can and that way delve into the intricacies of the payment companies operations and pinpoint vulnerabilities and fraud hotspots. supervision for sure won't solve all fraud problems, but it can go a long way to make sure companies are doing their part to flag fraud before it happens. >> is it fair to say that consumers are better protected with the benefit of the consumer protection bureau as opposed to without the benefit of it? >> yes. i think that is absolutely true. >> and with the other members of the panel be so kind as to indicate whether you think fraud protection is something

that we ought to be concerned with? do you think that fraud protection is something that we should concern ourselves with? would you kindly raise a hand? let the record reflect that all have raised our hands. let me move quickly to another aspect of this that i am concerned with. there have been suggestions that the threshold should be raised to 10 million as opposed to the 5 million where it is currently proposed to be elevated to. what would be the consequences of raising that threshold, professor? i am calling on you again. >> my understanding is that the setting of the cfpb of the threshold at 5 million transactions on a calendar year was designed to enable the bureau to supervise those firms that had the most significant share of this general use digital application market. and it was also based on

available data suggesting that there is a very high concentration within this market. so a very small number of firms processing millions, perhaps billions, of dollars worth of transactions in a year. and while there are many other firms that are not captured by the rule, but they handle fewer transactions. the focus is really on trying to supervise the firms that have the most critical role in the market. >> you indicated a small number. i have intelligence indicating that the agency has estimated that the threshold would capture approximately 17 entities. is that about what you have understood the case to be? >> that is what i understand based on the information the bureau has provided. >> 17 entities. all right. let's move to another area quickly. is it true that cash app allows users to sell stocks, buy and sell stocks? >> i am not familiar with that

function. >> is anyone familiar with the function? if so, you may speak. cash app, allowing users to buy and sell stocks? well i have received an indication that it does have this feature. and they can do so without a commission. this causes me some concern when we -- if this is a case. because of buying and selling stocks is a means by which a good amount of fraud can occur when we don't have the cfpb protecting the consumer. but i am hopeful that maybe this is incorrect. if it is, i will understand. if not, i am grateful that the cfpb is looking into this and i yield back . >> the gentleman from illinois is recognized for five minutes. >> thank you. just a quick question before i start. and i do want to be quick but i do want to get this on the record. all of you here before coming

here signed a truth and testimony form disclosing your government affiliations and contracts. i know a lot of you are speaking on behalf of of things that would benefit tech companies. do any of you have clients or tech companies? reach her hands. mr. kim, only you? can you disclose the amount of money the tech firms pay you? >> i don't know, sir. >> maybe we can follow up for the record. thank you for letting us know. i have a very naove hope here, which i listen to this and maybe the most naove thing i thought in congress is that i hope my wife and daughter are watching this because we have this debate at home and i don't use paypal or venmo and they are addicted to it and i tell them there are different rules here and am looking forward to them celebrating me as a

returning hero when i get home today. first, a quick question for you, mr. kim. and hopefully you feel it's important to maintain a wall between congress and banking? >> i think that is a policy question, sir. i am not qualified to answer that one. >> okay. i certainly do. i asked the question because the testimony of the professor you mentioned that interactions of customers with paypal is a lot like using the bank and you want to expand on what you meant by that? >> yes. i would be happy to in an individual uses non-bank intermediary, the payment still has to happen along the transmission line of the banking system. it is just a step removed. all of these platforms sit on top of the transmission lines of the banking system. but the consumer isn't interacting with the bank. the intermediary is acting with

the bank. so the benefit related to, for instance, fdic insurance, runs in favor of the intermediary. that leaves the consumer with just essentially a contract claim against the intermediary. as long as the intermediary has the assets to make good on withdrawal requests, payment requests, everything is fine. but if the intermediary becomes insolvent, that insurance to the banking system doesn't ultimately benefit the consumer and the consumer just has a claim in a bankruptcy against the intermediary, not unlike the customers of the now defunct ftx. >> i do appreciate that. i am a dyed in the wool deep free marketer and that means everybody has to play on the same playing field. the idea that if i use schwab and my daughter uses venmo, there are different rules and incentives and that strikes me as an un-capitalistic idea. i also want to pick on there is

a vapid libertarianism that says we should never give her information to the government because we can't trust government with information. but we should give all her information to private companies that have no obligation to the public interest to sell it to data brokers who can resell it to other governments whose interests are antithetical to our own. professor, you described this as a massive blind spot for the bureau. i wonder if you could expand on why we need to be more vigilant protecting consumer data, and what do we need to do to guard against in this role? >> a thank you. the reason why i said that is because we don't exactly know. and it may be, in some instances, companies that collect and process the data especially with ai programs know exactly what they are doing when they use data to make decisions relative to a variety of products and services. now, we do have visibility into

that when banks are doing so. that is because banks are subject to supervision both by the bureau above a certain asset class but always by the credential regulators. but we know there is way more innovation happening in data processing and artificial intelligence outside the bank system in the non-bank system. in that way, the bureau needs sort of some visibility into what is happening on that side of the house, if you will, because that is likely to be the place where there can be more consumer harm. >> i have 15 seconds left so we could follow up on the record after. i do have some concerns and some of the car votes -- carveouts for crypto as we have seen some of the currencies, there are some blind spots. so i don't know if you have thoughts on how we can improve this to