should the u.s. shut its borders. the debate is moderated by journalist barry weiss. watch it friday 9:00 p.m. eastern and online. >> c-span is your unfiltered view of government we are funded by these companies and more including media calm. >> we believe whether you live here or here or y out in the middle of anywayyou should have access to fast, reliable internet. that's why are we are leading the way taking you to 10 g. >> media calm supports c-span along with these other television providers giving you a front row seat to democracy. >> up next financial technology stakeholders share their thoughts on the proposed rule to regulate payment apps and digital wallets.

backers say it is necessary to protect consumers. opponents say it is too broad and could limit competition. this portion of the subcommittee hearing is about 90 minutes. [inaudible conversations] [inaudible conversations] >> come to order. without objection the chair is authorized to declare a re cess for the committee at >> the committee on digital assets financial technology will come to order. >> the chair is authorized to

declare a recess at any time. this hearing is entitled bureaucratic overreach or consumer protection. examining the latest action to restrict competition in the payments. without objection all members will 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 latest action to restrict competition and payments in my view is critical. it will talk about this large participants in the general use of digital payment applications market. it is the sixth lpr that the cfpb has initiated. putting aside the egregiously short comment time which frustrates

members of this committee the deeply flawed cost-benefit analysis which have both become hallmarks of this administration i find the substance deeply concerning. the proposal asserts that companies that let you send money to friends peer-to-peer or companies that keep your credit card information on your phone are somehow the exact same market. why? just because they say so. this breath of the market that they are trying to define has perplexed many on this committee from potentially covered entities to as i say both on both sides of the aisle here. many companies are utterly confused wondering not only how the role would be implemented but whether they are even covered by it. i would argue that this confusion is by no means an accident. the cfpb is trying to cast as wide a net as possible and become a technology regulator.

and many more ways than one, this marks a sharp departure from the previous large participation rules. the director has decided on a whim and in my view without justification that technology companies pose a threat to consumers and the role should be viewed as a thinly veiled workaround to get supervision teams into these tech companies. that is because once an entity is designated as a large participant, the cfpb cannot only supervise the activities which is what the intent was that originally qualify but they can actually supervise the business itself. the proposal intends to establish limits by only capturing those companies with 5 million transactions within a year. we would love to hear from a panel on is that a good number or a bad number. do not be fooled.

this modest threshold is so low the agency will effectively have cart launched to knock down the door of companies large and small with their fleet of examiners. there's no doubt the proposal would decrease incentives to innovate in the payment space and leave consumers encumbered with fewer firms from which to choose a payment method. that decreases competition. this does not benefit consumers or provide market clarity. in fact, the only people that this will benefit besides witnesses like you are compliance lawyers. to further expand their authority they have decided to capture digital assets under this proposal as well. the cfpb has searched the definition of funds includes digital assets. this is a novel position and the cfpb justifies this only in

a small and unassuming footnote. concerns around the proposal are not strictly partisan. comment letters were submitted by both sides of the aisle to express concern about the scope and implications. the cfpb needs to go back to the drawing board, work to protect consumers and not hinder innovation and expand the insatiable reach for more power and scope. we think our panel of witnesses for being here today. we appreciate your testimony and willingness to work with us. i now yield to the ranking member mr. lynch of massachusetts, five minutes for opening comments. >> thank you, mr. chairman. good morning and i would like to thank our witnesses today with your willingness to help with the work. it is the mission of the consumer financial protection bureau to safeguard consumers against unfair, deceptive and abusive financial practices and discrimination. the cfpb also ensures that

markets for consumer products and service operate fairly and efficiently. in the interest of consumer access and responsible innovation. further the cfpb recently proposed a role as the chairman noted that will allow the agency to exercise supervisory authority over larger non-bank technology companies that offer digital wallets and payment services including peer to peer payment apps electronic fund transfer apps. importantly this role will place apple, google, big tech companies that have 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 these companies do not currently undergo supervisory exams, periodic monitoring or compliance checks.

they may not even be required to ensure that company funds were deposits. the action in the area is timely considering the escalation of shadow banking. that is the migration of core banking activities to non-bank entities which currently fall outside the scope of regulation. the role is also necessary given the growing expansion of big tech companies into the financial services sector and the deployment of opaque artificial intelligence technologies. consumer usage of digital tap to pay in the u.s. has already reached $3 billion and is estimated to grow by 150% by 2028. moreover, an estimated two thirds of americans including a majority of low to moderate income users are relying on peer-to-peer digital payment such as paypal. many of these providers have already launched crypto currency payments for

options. it is not surprising that consumer advocates strongly support the role. according to the consumer federation of america, we would be concerned whenever the line between commerce and banking is permitted to blur. by closing this loophole the cfpb is moving forward old big tech companies accountable to play by the rules as everyone else. i agree with that statement. the cf bp is not becoming a tech regulator as much as tech companies are becoming banks or are becoming involved in the conduct of banking. by sector the -- subjecting large companies to the same as financial institutions the role will also protect consumers against massive data collection and modernization of personal information. cfpb estimates the proposed rule would only apply to 17

entities. the agency has also made clear that supervision is based on risk, size, and financial transaction volume as well as the extent of oversight. that is why the role includes a threshold of 5 million payment transactions annually. i look forward to hearing from our panelists and stakeholders as this process develops. thank you 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. you will be recognized for five minutes to get the oral presentation. without objection the written statements will be made part of the record. we welcome carl. he's the executive vice president of tech.. the managing director of global partners llc. james, the partner and had a thin tech industry group. jack,

a financial technology policy analyst at cato institute. and christopher alternate a professor of law at the university of iowa. you are recognized for five minutes. >> thank you. german , ranking member lynch and members of the subcommittee on digital assets . technology and innovation, thank you for the opportunity to discuss the consumer financial protection bureau proposed rule on defining larger participants in the market for general use consumer payment applications. i'm the executive vice president of technet the network of technology ceos 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, unlike 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 scope of their 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 the record. >> thank you, sir. >> thank you, of course. you're recognized for five 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 act was part 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, can 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, included by 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 check. 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 attempts to 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 services. >> does the cfpb's overly abroad approach and unclear definition of a market threaten innovation and competition in this space? >> absolutely. we have to protect consumers and safeguard them, but onerous regulations like this will have a chilling effect on innovation, particularly for small businesses and startups. people in a garage are just trying to make a dream work. it's really unclear whether or not, particularly with the five million transactions being so low, who would be covered in this. it's definitely more than 17, but if we're going to impose this type of compliance on a

small start-up, we're impacting our job growth and our ability 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-- explain to me why the cfpb would not be-- 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 technology companies 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 2008 crisis. 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 this past 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 to be 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't new for cfpb. could you highlight the importance of robust administrative procedures act process? >> why does it matter?

>> it matters because the agency does have a lot of power and in order to exercise its power, it should follow its statutory mandate in dodd-frank and other acts, primarily in dodd-frank, 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's been a significant amount of questions regarding the details of the rule. for example, the cfpb does not clearly define the term funds. there's concerns that this could rope in entities that transfer assets such as securities or even commodities that are outside the purpose of this rule making. mr. kim, 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, saying very clearly that the cfpb's jurisdiction end where the sec and the cfpb begins. so i think it's pretty clear that those two sister agencies have been very active in the digital assets and crypto space, so the bureau should, i think, respect and recognize the jurisdiction and the effort and the investment by those agencies and congress in the digital asset space. >> mr. johnson, could you offer your perspective on the far reaching nature of the proposal? this has long-term impacts. >> yes, congressman, it does have long-term impacts and i think the impacts will manifest over time due to the confidential nature of the supervisory process.

so, an overbroad market definition, an imprecise establishment of the asset threshold for determining larger participants mean that an unknown number of institutions will be subject to supervision as a confidential process, the public won't understand what the bureau does behind the scenes afterwards and i think that's the primary risk. >> focusing on the refire departments under the proposal, does the cfpb outline any specific examination procedures larger participants cover in overpayment services? please give us a sense what details the cfpb lays out in my remaining time? >> the only reference i'm aware of is the general statutory requirement that the supervisory process itself be risk based. notably the rule is not risk based and the bureau's determination of the market and subject to the proposed rule is not risk based. >> with that, mr. chairman, my time is about to expire, i'll

yield back. >> ms. waters is recognized for five minutes. >> thank you very much. to professor, the misleading title of this hearing suggests that the cfpb's larger participant rule 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 do not 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? >> thank you for the question. i agree with you that market dominance is a concern in the space. the dominance and the concentration of the consumers payments market by a handful of companies poses, i think, some significant dangers. when know when a small number of companies control the majority of the market, leads to higher prices and reduced innovation. and lower income households facing constraints maybe more impacted, more vulnerable to the price increases. also, market dominance in the consumer space 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 in this space could monitor instances of unfair acts and practices by nonbank payment firms that make it more difficult for consumers to untangle themselves from their payment account relationship and move on to other providers that might be more optimal for uses. >> thank you, professor. can you speak to the broader concerns about the potential for monopolistic use of data and power by big tech companies. how concentrated is the market for payments currently and what risk do you forsee in the absence of enhanced supervision by the cfpb under its new proposed rule? >> so some of the empirical data right now indicates that a vast majority of u.s. households use just a few of the platforms. i think 60% of u.s. adults use

venmo and paypal. that's a concentration. that level of concentration and the way it generates very sensitive consumer financial data raises really significant concerns, particularly relative to privacy. i think this rule is animated by that concern. we know that major tech companies build their business models around the large collection and analysis of user data, like browsing history, social interaction and search inquiries. having this payment information helps build even larger stockpiles of data about consumers which held by just a few companies can be very powerful, as i mentioned in my earlier 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 dodd-frank. i was so happy that the

consumers finally had a agency dedicate today taking their care of their concerns. mr. hill has said it's been controversial. controversial because the opposite side of the aisle did not 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, but this helps bring out what the cfpb is responsible for, what they should be doing, and it does not 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, and i'll yield back. the gentlewoman yields back. >> thank you, chairman hill and thank you for our witnesses being here today. ...

>> risky and subjected to supervision through its statutory authority. mr. johnson, are there any manyfold considerations the cfpb is required to make you for determining a company is risky? or has a cfpb set this up as an arbitrary process where they have unlimited discretion? >> the standard of evidence the bureau has established through his procedure rule is quite low. and the real problem here is the bureau changed its procedural rules to make nonpublic

confidential processes associated with the supervision of institutions public in one instance in one instance only and that's what the company challenges the proposed determination. so this creates leverage for the agency to say we want to supervise you and if you fight us on this then we're going to publicly menu as having challenge that proposed designation subject among other things class-action and reputational harm. >> thank you. one of the factors the consumer financial protection. proposal uses to determine if a non-bake covered person would be included in the general use digital consumer payment application space is whether they provide at least 5 million covered transactions annually. market participants have indicated this threshold is alarmingly low. mr. holshouser, would you describe the potential market impact if the cfpb categorizes

into the entities with such a small market share as larger participants? >> so the minimum 5 million transactions alarmingly low. if you think about just some of the small to medium-size businesses having tens if not hundreds of thousands a day, that threshold is so low it's obvious it's an attempt to increase the purview of oversight of the cfpb, which will as i mentioned earlier have outsized effect on startups and small and medium-size companies who are trying to innovate and grow. and disproportionally affect them. >> thank you. appreciate the inset. mr. kim, how has the cfpb historically determined, determine 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's specific to a very well-defined market and so there hasn't been i think the uncertainty there is today with this rule. so, for example, with credit reporting that's a very well-defined market. i don't think there was a lot of discussion or uncertainty about what is large in that market. same for a lot of the other lpr is. today's are nothing highlights the uncertainty with this particular lpr. >> in your view to the cfpb conduct significant analysis to arrive at the threshold and a proposal? >> i don't see it in the proposed rule. i can't tell you what the basis was for 5 million. i can say that very anecdotally there are as mr. holshouser said come smaller to mid sized payment companies that would easily meet that threshold within a matter of months.

>> shift gears a bit. mr. johnson, in addition to larger disparate rulemaking the consumer cfpb is attempting to create a non-bank registry. i signed a letter my colleague led in may of last year highlighting our concerns with these actions by the cfpb. the cfpb has justified the need for for a costly come for coffee registration where non-bank companies quote self-report public orders like enforcement actions or consent orders so consumers can be on the lookout for repeat offenders. mr. johnson, ms. josquin isn't this information already public? >> it is and other aspects of that proposed rulemaking are equally troubling. >> and i see my time has expired so i yield back, mr. chairman. >> gentleman yields back. mr. sherman from california is recognized for five minutes. >> i, too, 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. while consumers need the protection now, we may get it in several more years. this initial pre-rule is long past due. in this town -- i been in this long time and it's not in at least wants to lobby 101 secret classes here the rule is very simple but teaching a simple. if the facts are on your side, argue the facts. if you're on the side of good public policy, argues the public policy. and if the facts are against you and the public policy is against you, argue the procedure. that's mostly what we have here. people telling us that the procedure is summa all. the most extreme of those arguments is to add the cryptic currency 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 chair, regimen of the subcommittee i was here for dodd-frank and and i can asu that when we said signs would certainly include anything that qualified as a currency. banks have long, i've not really enjoyed the community reinvestment act, and so the high-tech company to decide if we can be a bank, but call ourselves fintech, and we don't have to live with the community reinvestment act or the host of others. mr. monet, paypal is holding onto i think it's about

$18 billion of testimony. i assume assume that they invested as they will come maybe safe investments, maybe speculation. if they go bankrupt, does the fdic reimburse the customers? >> thank you for the question. the simple answer is no. those customers are holding their phones with the relationship only to that non-bank intermediaries. the fdic -- >> it's like loading mother to your brother not if your brother-in-law is sam bankman-fried's. >> yes. >> okay. i'll ask mr. holshouser, representing technet. if one of your members goes bankrupt will the other members ship in and make the customers hold or will those customers, voters be here demanding congress bail them out? >> depends on what side of the

fintech and as you speaking of. there's reliability, credit and debit and of the product but some exposure. >> you've got, right now they're holding onto $18 billion. they they are investigating either something safe or maybe pork bellies, i don't know where they put their money. where are they put it today they can put it somewhere else more risky tomorrow. your members are not going to build them up. it here demanding a bailout from congress. i'll point out the deal with venmo is that 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's only 1.75% but that is just for three days instead 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 in pork bellies, 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 the 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 non-bank payment platforms can also this is also particularly true for crypto firms, is they do so under the misperception that when they do they enjoy the same sort of

regulatory protection they have when you deal with a broker and invest in securities or deposit accounts when they deal with the banks, which is manifestly not the case. >> thank you. >> the time of the gentleman has expired. esther davidson is recognized for five minutes, the vice chairman. >> i think the chevy to i think it's great we're having this hearing and it's important we address just growth of government. seems like the government expands every year. we do have one party that campaigns on a smaller government. we are not doing so will get every year every congress can we get more government. one of the guaranteed to grow forms of government was the consumer financial protection bureau. the mission and cause are important. i think we have multiple ways to try to address that. one of the things that support we get the right kind of government wherever we have it is that participation. so mr. kim, 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, cfpb has to show to bring an enemy the under its supervision? >> -- enmity. >> a statute, talk about dodd-frank, requires cost-benefit and risk analysis. so an identifying number one a market that is right for supervision, charted in five risk to consumers in that market. that's what i see is lacking in the rule. >> thank you. i guess cost-benefit might not overtly address harm but it seems like there's always a case can we just need more government. one of footnotes cfpb tucked into their proposal many believe would give the bureau supervisor authority and divisions within a company, their 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're referring to were the bureau's that if institution qualifies that a larger participant within the defined market cfpb that only achieves supervisory authority can examine for the product line that you in as a larger participant but can thereafter and forever more examine institution for any other product line that may be a current product or service. and i think that expansive view of the bureau's of this country to the specific process the congress established identifying a larger participant within a specific market. >> thank you for the clarification. it's the hook that allows kind of more spread. a lot of time government sort of like an invasive plant, once it gets in a field it just keeps

growing. and the only way to get it out is to dig it up beirut and branch. if it's actually doing something useful, you at least have to prune it to make sure it doesn't overtake everything else. i think companies defined themselves under regulatory scrutiny are frustrated because there seems to be no satisfaction -- companies find suspect there's always more pic that stick which are 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're happy to cooperate with you. what do you need to know? and they share in this information and they never get an answer. it's like hotel, for any sort of way. you can never check out. you can never leave. so could you highlight the

particular challenge digital asset companies confront cfpb trying to put hooks in them and regular environment where in no other part of the economy are the getting real clarity? >> i agree, congressman. think the lack of regulatory clarity in the digital asset space presents a a real problm for market participants there. it's my view the proposed rule only muddies the waters here. not only does lack of risk-based justification make the room unjustified but it also leaves market participant in the dark regarding how they're supposed to prioritize compliance and whether there are even supposed to be covered by the proposed rule. >> yeah, so thank you. i hope that we do what our committee has set out to do is provide that regulatory clarity. we passed it in 21. we passed a a ban on central bank digital currency. we passed stablecoins legislation and we importantly protected the right of self custody. are there any concerns at the

cfpb's approach threatens self custody? because frankly one of the most important protections we found as companies may be haven't flourished, they that problems, some have failed, users have been harmed notably by ftx, is an self custody of way to protect yourself? >> self custody 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 at the yield. >> we turn to the gentle than from texas green for five minutes. >> thank you, mr. chairman. i thank the ranking member and the witnesses as well. professor, the consumer federation of america weaselly submitted a statement on payments fraud for senate banking committee hearing

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

thwart consumer fraud before it occurs. the bureau can closely monitor compliance with these apps to ensure payment companies have, for instance, robust dispute resolution mechanisms as well as disclosures. and, of course, the bureau can also assess a companies risk assessment strategies and the bureau can in that way delve into sort of the intricacies of the payment companies operations and pin point vulnerabilities and fraud hotspots. supervision for sure will not fall 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 pgh . >> 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 their hand. let me move quickly to another aspect of this that i'm concerned with. there have been some 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 the threshold, professor, i'm calling on you again. >> my understanding is that the cfpb's setting of a threshold at 5 million transactions on a calendar year was designed to enable the bureau to supervise those firms that have the most significant share of this general use digital consumer payment application market, and that it was 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. while there are many other firms that are not captured by the rule but they handle fewer transactions. the focus was really on trying to supervise the firms that have the most critical role in the market. >> you've indicated a small number. i have intelligence indicating that the agency has estimated that the threshold would capture approximate 17 entities. is that about what you've understood the keys to be? >> that's what i understand based on information the bureau has provided. >> seventeen entities, all right. let's move to another area quickly. cash app, is it true that cash app allows users to sell stocks, buy and sell stocks? >> i'm not familiar with that

particular function. >> is anyone familiar with the function? if so, you may speak. cash app, allowing users to buy and sell stocks? well, i've received an indication that it does have this feature, and they can do so without a commission. this causes me some concern when we come if this is a case, because by 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. though i'm hopeful that maybe this is incorrect, and if it is i will understand, but if that i'm grateful that the cfpb is looking into this. i yield back the balance of a time. >> the gelatin from illinois is recognized for five minutes. >> thank you. just a quick question before a start and want to be quick but i did want to get this in the record.

all of you before coming here side of truth in testimony form disclosing your government affiliations and contracts. i know a lot of you are speaking on behalf of things that would benefit the tech companies. a quick raise of hands. do any of you have clients who are tech companies? raise your 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 want, i have a very naïve hope you were to listen to this and maybe the most naïve thing about that in congress i hope my wife and daughter watches because bee with us all going to be at home. i don't think wish while. i do not use paypal, i do not use venmo. they're completely addicted to it and they told their different rules here and i'm looking forward to celebrating being a

returning here when i get home later today. first quick question for you, mr. kim. hopefully do you feel it's important to maintain a wall banking? >> i think that's a policy question, sir. i'm not qualified to enter that one. >> okay. i certainly do. i asked the question because united states indigestible you mentioned customers interactions with paypal is a lot like using a bank. you want to expand of that, what you meant by that? >> yes i'd be happy to. so when an individual uses non-bank intermediary, the payment still has to happen along the transmission line of the banking system. it's just one step removed. so all of these nonbanking platforms sit atop the transmission lines of the banking system but the consumer is not interacting with the bank.

the intermediary is interacting with the bank. so the benefit related to, for instance, fdic insurance, run in favor of the intermediary. and that leaves of the consumer with the just what is essentially a contract claim against the intermediary. as long as the intermediary has assets to make good on withdrawal request, payment request, then everything is fine. but if the intermediary becomes insolvent, that insurance through the banking system ultimately does not benefit the consumer. the consumer just has a claim in a bankruptcy against the intermediary, not unlike the customers of the now defunct ftx. >> i appreciate that because i'm a dyed in all deep free marketer, and like free markets mean everybody has to play on the same playing field an idea that if i use schwab and by doug hughes then the festivals, different incentives. that strikes me as a fundamentally anti-capitalistic idea -- -- venmo.

there's this sort of libertarianism that says that we should never give her information to the government because we can't trust government information. the we should get all information to private companies that have no obligation to the public interest to consummate the data brokers who can then resell the information to other governments whose interests are antithetical to our own. professor odinet in your test when you described this as a massive blind spot for the bureau, and i wonder if you could expand on why we need to be more vigilant protecting consumer data and what we need to guard against in this role? >> thank you. the reason why i said that is because we don't exactly know, and it may be in some instances the companies that collect and process the data taken as you sophisticate artificial intelligence programs know exactly what you are doing when they use data to make decisions

relative to a variety of products and services. now, we do have some visibility into that when banks are doing so. that's 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's way more innovation happening in data processing and artificial intelligence outside the bank system in the non-bank system. so in that way the bureau needs sort of invisibility into what's happening on that side of house if you will because that's likely to be the place where there can be more consumer harm. >> i see i've got 15 seconds left to meet if we could follow-up in the record afterwards, i do have some concerns that in some of the carveouts for crypto, taken as we've seen some of the company site paypal developing stablecoins as we've seen some of the runs and other currencies, there are some blind spots so tonight if you thoughts about how we might improve the