Consumer Financial Services Alert
SDNY: Crypto Regulated as “Funds,” Platforms as “Financial Institutions”Read Time: 2 mins
On February 22, 2023, the United States District Court for the Southern District of New York in Rider v. Uphold HQ Inc. held that cryptocurrencies constitute “funds” under the Electronic Fund Transfer Act (EFTA). The plaintiff brought one federal cause of action under the EFTA and eight state law claims. The defendant made a motion to dismiss plaintiff’s claims, including the EFTA claim, asserting that the EFTA applies only to transfers of “funds” and cryptocurrency does not constitute funds. The District Court disagreed with the defendant’s position.
The District Court determined that defendant is a “financial institution,” as defined by the EFTA, because it “holds an account belonging to a consumer.” 15 U.S.C. § 1693a(9). Further, defendant directly maintains consumer accounts which enable its users “to transfer, purchase, trade, hold, and sell various cryptocurrencies on its platform.” Defendant allowed a consumer to initiate electronic fund transfers of cryptocurrency, thus requiring the District Court to analyze whether cryptocurrency met the definition of “funds,” which is not a defined term under EFTA.
Because “funds” and “cryptocurrency” are not defined, the District Court turned to Black’s Law Dictionary for each respective definition and also applied the ordinary meaning of the terms. “Funds” is defined as “[a] sum of money or other liquid assets established for a specific purpose.” Under its ordinary meaning, the term “cryptocurrency” means a digital form of liquid, monetary assets that constitute “funds” under the EFTA. The District Court held that cryptocurrencies constituted “funds” within the meaning of EFTA, and thus customers could proceed with an EFTA claim.
As a result, the District Court dismissed defendant’s motion to dismiss the plaintiff’s EFTA claim. In doing so, the District Court rejected the defendant’s reliance on a CFPB 2016 final rule, Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E), and the Truth in Lending Act (Regulation Z) (81 Fed. Reg. 83934, 83978-83979 (Nov. 22, 2016). The District Court rejected this position because the CFPB specifically did not take a position on the EFTA’s application to virtual currencies and services. However, the CFPB advised that, “as part of its broader administration and enforcement of the enumerated consumer financial protection statutes … [it] continues to analyze the nature of products or services tied to virtual currencies.” Id.
In any event, ordinarily legislative history should be used only to resolve ambiguity, which was not a problem presented in Rider. The District Court’s ruling in Rider v. Uphold indicates that cryptocurrency platforms may be “financial institutions” that hold a customer account; thus, these platforms are subject to the EFTA and its implementing Regulation E, because the transfer of funds therein includes cryptocurrencies.
 See, e.g., United States v. Iossifov, 45 F.4th 899, 913-14 (6th Cir. 2022) see also United States v. Day, 700 F.3d 713, 725 (4th Cir. 2012) (“Turning to the ordinary meaning of ‘funds,’ we think the term refers to assets of monetary value that are susceptible to ready financial use.”). Rider v. Uphold HQ Inc., No. 22CV1602 (DLC), 2023 WL 2163208, at *3 (S.D.N.Y. Feb. 22, 2023).
 See United States v. Dauray, 215 F.3d 257, 264 (2d Cir. 2000).