FDIC Advises Financial Institutions and the Public On Crypto AssetsAugust 5, 2022
Liquidity troubles at the US-based cryptocurrency brokerage firm Digital Voyager led to the suspension of trading activities on its platforms in July 2022. The liquidity crisis arose from the Singapore-based crypto hedge fund, Three Arrows Capital (3AC), which failed to repay a loan of about US$650 million to Voyager Digital.
Voyager Digital later made various representations on its website and social media platforms advising that its customers’ funds were insured under the US Federal Deposit Insurance Corporation (FDIC). This prompted a series of actions from US regulators informing the public of crypto assets.
As per July 28, 2022, cease and desist letter to Voyager Digital, the FDIC and the Board of Governors US Federal Reserve System jointly requested Voyager Digital to “take immediate corrective action to address these false and misleading statements” within two business days.
The FDIC released an advisory to FDIC-Insured Institutions on deposit insurance and on dealings with crypto companies. The FDIC clarified on the products that are insured: “FDIC deposit insurance covers deposit products offered by insured banks, such as checking accounts and savings accounts. Deposit insurance does not apply to non-deposit products, such as stocks, bonds, money market mutual funds, securities, commodities, or crypto assets”.
The advisory further stated that “FDIC insurance does not protect against the default, insolvency, or bankruptcy of any non-bank entity, including crypto custodians, exchanges, brokers, wallet providers, and neobanks”
The FDIC requested FDIC-Insured Institutions: “In their dealings with crypto companies, insured banks should confirm and monitor that these companies do not misrepresent the availability of deposit insurance in order to measure and control risks to the bank, and should take appropriate action to address such misrepresentations”.
In its guidance to the general public, the FDIC also released a fact sheet on deposit insurance and crypto companies. The fact sheet stated, “The FDIC does not insure assets issued by non-bank entities, such as crypto companies”.
On products covered by the FDIC, the fact sheet reiterated that: “Deposit insurance applies to products such as checking accounts, savings accounts, and certificates of deposit held at insured banks”.
Whilst addressing risks not covered by the FDIC, the fact sheet stated that: “FDIC deposit insurance does not apply to financial products such as stocks, bonds, money market mutual funds, other types of securities, commodities, or crypto assets”.
The recent failures amongst some crypto companies will only intensify calls for faster regulation and more public education on crypto assets.
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