On August 11, in the case of Yuille v. Uphold HQ Inc., the Southern District of New York was tasked with determining whether the Electronic Funds Transfer Act (EFTA) applies to digital asset-based accounts. The court concluded there was no “account” as defined by EFTA because the digital asset account at issue was not established primarily for personal, family, or household purposes.
In February of this year, this same court presided over Rider v. Uphold HQ Inc., another case involving EFTA and digital assets, which we discussed here. After acknowledging that EFTA does not define the term “funds,” the court in Rider held that EFTA applies to digital asset-based transactions because the term cryptocurrency means a digital form of liquid, monetary assets that constitute funds under EFTA.
EFTA generally applies to “electronic funds transfers,” which encompass “any transfer of funds, other than a transaction originated by check, draft, or similar paper instrument, which is initiated through an electronic terminal, telephonic instrument, or computer or magnetic tape so as to order, instruct, or authorize a financial institution to debit or credit an account.” EFTA’s implementing regulation, Regulation E, requires financial institutions that receive notice of an unauthorized funds transfer to, among other things, conduct and complete an investigation within ten business days of receiving such notice and correct any error that the financial institution determines was committed within one business day of discovering the occurrence of the error.
In Yuille, the plaintiff alleged that in August 2021, he transferred a whopping 106 Bitcoins (worth approximately $5 million USD at the time of transfer) to a digital asset account that Uphold HQ Inc. (Uphold) created on his behalf and maintained on its platform (Account). However, in December 2021, the plaintiff allegedly became aware that an unauthorized third-party had infiltrated the Account, changed the plaintiff’s password, and changed the email address associated with the Account. The plaintiff further alleged that he notified Uphold of his inability to access the Account to no avail. According to the plaintiff, “[he was] a consumer, the Account was established for personal, family, or household purposes, and the transactions at issue were unauthorized electronic funds transfers (ETFs),” thereby triggering Uphold’s duty to comply with EFTA and Regulation E’s error resolution obligations. To strengthen his argument, the plaintiff requested the court adopt Judge Cote’s interpretation of the undefined term “funds” within EFTA as discussed in Rider.
Without expressly disagreeing with the Rider opinion, the Yuille court held the plaintiff’s theory failed as a matter of law for a different reason altogether: the Account was not an “account” as defined by EFTA. EFTA defines “account” as “a demand deposit, savings deposit, or other asset account . . . established primarily for personal, family, or household purposes.” Understanding that EFTA and the Truth in Lending Act (TILA) both contain the definitional phrase “established primarily for personal, family, or household purposes,” the court reviewed other courts’ interpretation of this phrase within the context of TILA to evaluate whether EFTA governed the Account.
Under TILA, a loan is obtained for business purposes (and not consumer purposes) if the borrower obtains the loan to make a profit. As a result, the court held that the operative inquiry in determining whether EFTA applies to digital asset-based accounts is whether such accounts are created primarily for “profit-making purposes.” On this point, the court concluded that the plaintiff established the Account primarily for investment purposes (which has an inherent profit motive) since he opened the Account to: (1) hold Bitcoin; (2) to sell and reduce Bitcoin in the Account to dollars and transfer dollars to his bank account; and (3) to trade digital assets like those listed on Uphold.
While the Yuille court did not expressly reject the Rider opinion, we expect that digital asset exchanges will look to leverage the Yuille opinion moving forward given the court’s substantiation of its analysis through its examination of TILA. Interestingly, however, the Yuille holding may not be applicable to financial institutions who offer accounts that may be primarily opened for personal use and that may grant consumers access to digital assets within the same platform.