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1 [1] (April 18, 2022)

handle is hein.crs/govefoz0001 and id is 1 raw text is: Digital Wallets and Selected Policy Issues S April 18, 2022 Digital Wallet Landscape A digital wallet is a software application that stores payment or account details to facilitate traditional payments that use bank and credit card details and/or cryptocurrency transactions. In addition, wallets facilitate peer-to-peer transfers, which have grown rapidly in recent years (Figure 1). This In Focus discusses three types of digital wallets and addresses selected policy issues. Functionality and Scope of Use Digital wallets are generally used for (1) payments to merchants through the use of near-field communication or QR codes for in-person purchases; (2) peer-to-peer transfers of funds through an app, via text message, or QR codes; (3) storing value from a linked bank account or debit card on an app-based account; or (4) storing, providing access to, and transacting in cryptocurrency. (For more on cryptocurrency, see CRS Report R45427, Cryptocurrency: The Economics of Money and Selected Policy Issues.) Digital wallets generally require the use of internet- connected hardware, such as a smartphone. Some, including Apple Pay and Google Pay, may work only with certain devices and associated operating systems. Others, such as the PayPal or Cash apps, can be downloaded and accessed from a range of devices, irrespective of operating system. For conceptual simplicity, it can be helpful to think of digital wallets as belonging to one of three groups: retailer- specific, general purpose, or cryptocurrency. Figure I. Peer-to-Peer Transaction Value 1,261.53 1200 CO 2 8 Source: eMarketer, https://www.emarketer.com/content/zelle- recordis-explosive-q2-growth-faces ..rivals. Retailer-specific mobile wallets are offered by a retailer for use to purchase its goods and services. They allow individuals to store payment card information, upload funds to digital or registered gift cards, or prefund a balance on an app for future transactions. General purpose mobile wallets provide much of the same functionality as retail-specific wallets do but are not limited to a specific merchant. For example, someone might use a wallet to make payments at a grocery store, purchase goods online, or pay rent. General purpose mobile wallets include apps tied to a smartphone and those that can be used on any device. Often the companies that provide general purpose wallets are regulated as money transmitters, a state-licensed financial business that moves money between customers. Cryptocurrency wallets can be divided into three types. Custodial wallets are hosted or maintained by third-party institutions (such as a crypto exchange). They are funded by bank accounts, and most can be used to buy, sell, or trade certain digital assets. Platforms that host custodial wallets execute digital asset transactions on the account holder's behalf and log them on the custodian's books (or off- chain) rather than on the distributed ledger blockchain of the coin. Non-custodial wallets are not hosted by third-party institutions. They maintain the keys necessary to access and sign the assets for transmission to blockchains and represent the asset's location on the network. Loss of private keys renders cryptocurrency irretrievable. A non-custodial wallet user can transact in crypto without relying on a custodian. Cold-storage wallets are pieces of hardware that allow end users to store cryptocurrencies offline, a practice that shields them from hacking. Cold-storage wallets can be connected to the internet to perform transactions. Policy Considerations for Digital Wallets Wallets are not themselves accounts or payments but a vehicle for accessing accounts or making payments. Many policy issues that relate to accounts and payments, but not wallets, are often conflated with digital wallet issues. Policy issues highlighted below are specific to wallets. Data Privacy and Security Companies offering digital wallets and payments companies generate, and may collect, information about users as part of their business models, raising concerns about privacy and data security. These companies are subject to certain provisions of the Gramm-Leach-Bliley Act (P.L. 106-102) that protect users' nonpublic personal information (NPI). In particular, the act requires the companies to provide privacy notices to consumers about how they use their data and to safeguard the confidentiality of NPI from unauthorized access, but they can typically share information with affiliates and may share information with nonaffiliates unless users opt out. This policy issue may be addressed through a potential proposed rulemaking for Section 1033 of the Dodd-Frank Act (P.L. 111-203). Section 1033 requires any company or individual offering financial services to provide information it has collected in offering or providing the service to any consumer that requests it. The law, which has not yet been https://crsreport

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