FDIC claimed that while deposits at banks with insurance were protected up to $250,000, there was no equivalent protection for deposits made with cryptocurrency businesses.
The Federal Deposit Insurance Corporation (FDIC) of the United States has released a statement warning the public that it “does not protect assets created by non-bank businesses, such as cryptocurrency firms.”
The FDIC informed banks in the United States on Friday that they needed to evaluate and control risks in third-party connections with cryptocurrency companies. While deposits at insured banks were protected up to a maximum of $250,000, the government agency claimed that no such protections were available “against the default, insolvency, or bankruptcy of any non-bank entity, including crypto custodians, exchanges, brokers, wallet providers, or other entities that appear to mimic banks.”
“Some crypto companies have misrepresented to consumers that crypto products are eligible for FDIC deposit insurance coverage or that customers are FDIC-insured if the crypto company fails,” said the Federal Deposit Insurance Corporation. “These sorts of statements are inaccurate and can cause consumer confusion about deposit insurance and harm consumers under certain circumstances.”
The warning came after a letter from the FDIC’s enforcement section on Thursday, in which assistant general counsels Jason Gonzalez and Seth Rosebrock said that cryptocurrency lender Voyager Digital had misrepresented insured deposits in “false and deceptive” ways. The legal team claimed that in the event of the demise of the company, neither Voyager clients nor cash placed on the platform would be insured by the FDIC.
“Customer confusion can lead to legal risks for banks if a crypto company, or other third-party partner of an insured bank with whom they are dealing, makes misrepresentations about the nature and scope of deposit insurance. Moreover, misrepresentations and customer confusion could cause concerned consumers with insured-bank relationships to move funds, which could result in liquidity risk to banks and in turn, could potentially result in earnings and capital risks.”
In 1934, the FDIC started covering deposits, initially with a cap of $2,500. Despite more than 9,000 of these establishments collapsing before 1940, the federal agency declared that since that time, no depositor had “lost a dime” in an FDIC-insured bank. Between 2001 and 2022, 561 insured banks collapsed, with the number peaking at 157 in 2010.