• FDIC fact sheet states that only deposits at insured banks and savings associations are insured in the event of an insured institution’s failure.
• Deposit insurance does not apply to financial products such as stocks, bonds, money market mutual funds, securities, commodities, or crypto assets, including stablecoins.
• Financial institutions should take care when describing benefits of partner-provided services to ensure customers understand what services and protections are provided and what products are covered by FDIC insurance.
• Misrepresentation can result in enforcement action and other legal and civil liability.                     

On July 29, 2022, the Federal Deposit Insurance Corporation (FDIC) issued a fact sheet and advisory highlighting the importance of not misrepresenting FDIC insurance and clarifying what FDIC insurance covers.

As cryptocurrency and digital assets become more commonplace and insured institutions increase related services directly or through partners, regulators have taken steps to make sure consumers and other financial institution customers understand what is being offered, the protections and features of those products, and the relationships among their financial institutions and the companies that actually may be providing those products or services.

The advisory follows a joint letter from the FDIC and the Federal Reserve on July 28, 2022, demanding that crypto brokerage and lender Voyager Digital cease and desist from misrepresenting its deposit insurance status.

Key Points from the FDIC Fact Sheet and Advisory
The FDIC and Federal Reserve found that Voyager Digital stated or suggested that

• Voyager itself is insured by the FDIC;
• Customers who invested with the Voyager cryptocurrency platform would receive FDIC insurance coverage for all funds provided to, and held by, Voyager, without reference to the insured depository institution account; and
• The FDIC would insure customers against the failure of Voyager.

The FDIC’s fact sheet did not directly address Voyager, but it included information to help digital asset businesses avoid misrepresenting their services and insurance provided to insured accounts at covered partner institutions.

The FDIC emphasized that deposit insurance only covers insured banks and savings associations, and it does not cover nonbanks including crypto companies. Further, the fact sheet clarified that deposits are only insured in the event of a covered bank or savings association’s failure.

Next, the fact sheet also made clear that federal deposit insurance only applies to select products such as checking and savings accounts and does not apply to other financial products such as stocks, bonds, money market mutual funds, securities, commodities, or crypto assets.

The fact sheet also explained 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.” This point is particularly important for consumers to understand as more and more nonbank companies over financial products and services, which may provide value but are not insured by the FDIC.

The FDIC’s advisory noted risk management and governance considerations for banks and savings institutions to minimize legal and supervisory risk related to misrepresenting their deposit insurance status. The advisory recommended that covered financial institutions:

• Confirm and monitor to ensure that nonbank partners offering crypto products do not misrepresent deposit insurance status and have clear disclosures related to FDIC-insured products;
• Carefully review marketing materials of nonbank partners;
• Establish policies and procedures related to deposits from any third-party, including crypto companies; and
• Determine if third-party risk management procedures effectively manage crypto-related risks.

Implications for Banks and Crypto Companies

The FDIC’s advisory indicates increasing scrutiny on banks with third-party relationships with nonbanks including crypto companies. To mitigate risk, banks that engage or plan to engage in relationships involving crypto companies should scrutinize their vendor due diligence policies and procedures and partner agreements, as well as marketing materials and disclosures of their partners. This is particularly true for banks offering custody services to customers of crypto companies, whose customers may not understand that not all their funds with the crypto company are FDIC-insured.

On the other side, crypto companies should prepare for enhanced due diligence from banking relationships as well as additional regulatory attention. Crypto companies partnering with FDIC-insured institutions should take care to ensure they carefully and accurately represent and describe their products and services as well as insurance provided through their bank partners. Companies should take steps to assure that marketing and compliance functions are prepared for this heightened diligence to maintain their valuable business relationships.   

Put Patomak’s Crypto Expertise to Work 

Patomak has deep experience in helping banks and other financial institutions assess emerging risks related to public policy developments and market opportunities in the digital assets space. Contact us to learn how Patomak can help you navigate these challenges and help you meet your business goals.

Links

• Press Release: FDIC Issues a Fact Sheet to the Public on FDIC Deposit Insurance and Crypto Companies
• Fact Sheet: What the Public Needs to Know About FDIC Deposit Insurance and Crypto Companies
• Advisory to FDIC-Insured Institutions Regarding FDIC Deposit Insurance and Dealings with Crypto Companies
• Joint Press Release: FDIC and Federal Reserve Board issue letter demanding Voyager Digital cease and desist from making false or misleading representations of deposit insurance status.