On 7/29/22, the FDIC issued a crypto advisory: “Notice to FDIC-Insured Institutions Regarding Deposit Insurance and Transactions with Crypto Companies“due to its concern about the confusion consumers have regarding Crypto assets “offered by, through or in connection with insured depository institutions (insured banks)”. Crypto assets are not legal tender (no currency fiduciary) and are NOT backed by the full faith and credit of the government. Crypto asset accounts and value balances” offered by, through, or in connection with insured depository institutions (insured banks) are not covered by FDIC insurance or Securities Investor Protection Corporation (SIPIC) protection. crypto investors need to realize that there is NO regulatory agency that oversees crypto – You are alone! That said, insured banks should recognize that consumer confusion resulting from Crypto misrepresentation can lead to a threat to corporate governance that can result in legal, liquidity, and capital risks.
Why the consumer confusion? Inaccurate representation!
The crypto market has recently suspended withdrawals or simply stopped working. Crypto prices have plunged, jobs have disappeared, and some companies are under the eye of federal regulators. This type of market activity, coupled with all the media reports and coverage, has created further consumer confusion. For example, the FDIC states that there is a consumer perception risk when a non-bank entity offers crypto assets to non-bank customers, while simultaneously offering the deposit products of an insured bank. Inaccurate representations come from the deposit insurance of non-banks (including crypto companies), which can confuse non-bank customers and lead those customers to mistakenly believe that they are protected against any type of loss. As a result, non-bank customers may not understand the role of the bank with respect to the business of the non-bank, or the speculative nature of certain crypto assets versus deposit products. In summary, the FDIC’s concern stems from the reality that customers of Crypto Companies (defined by the FDIC as Crypto Custodians, Exchanges, Brokers, Wallet Providers, and Neobanks) may have the false belief that they are covered by FDIC insurance.
FDIC releases fact sheet to address some common misconceptions
The Fact sheet issued by the FDIC wants consumers to know the following:
- In the unlikely event of an insured bank failure, the FDIC protects insured bank depositors against the loss of their deposits, up to at least $250,000. Under federal law, the FDIC only insures deposits held in insured banks and savings associations (collectively, “insured banks”) and only in the unlikely event of an insured bank’s failure. The FDIC does not insure assets issued by non-bank entities, such as crypto companies.
- Since the FDIC began insuring deposits in 1934, no depositor has lost a penny of FDIC-insured funds as a result of the failure of an insured bank.
- Deposit insurance applies to products such as checking accounts, savings accounts and certificates of deposit held at insured banks. (https://www.fdic.gov/resources/deposit-insurance/financial-productsinsured/index.html)
- The FDIC only pays deposit insurance after an insured bank fails. Cover is only available for deposits held in the insured bank at the time of its failure
Understand what is NOT covered by the FDIC
- 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.
- FDIC deposit insurance does not protect against losses due to theft or fraud, which are covered by other laws.
- 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.
Consumer confusion may prove to be a ‘corporate governance risk’ for insured banks
Here is the FDIC Risk Management and Governance Considerations Message to Insured Banks Pursuant to the Crypto Advisory:
- Insured banks should be aware of how FDIC insurance works and should assess, manage, and control risks arising from all third-party relationships, including those with crypto companies.
- In their dealings with crypto companies, insured banks should confirm and monitor that such 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 remedy these misrepresentations.
- Communications related to deposit insurance should be clear and visible. Non-bank entities, such as crypto companies, that advertise or offer FDIC-insured products through relationships with insured banks could reduce consumer confusion by: (a) clearly stating that they do not are not bank insured; (b) identify the Insured Bank(s) where Client Funds may be held on deposit; and (c) communicate that the crypto-assets are not FDIC-insured products and may lose value.
- Insured banks that are involved in relationships with non-bank entities that offer deposit products as well as non-deposit products, such as crypto assets, can help minimize customer confusion and harm by carefully reviewing and Regularly monitoring non-bank marketing materials and related disclosures to ensure accuracy and clarity.
- For safe and sound operation, the insured bank must have appropriate risk management policies and processes to ensure that all services provided by, or deposits received from, any third party, including a crypto company, are and remain compliant. to all laws and regulations.
- In addition, Part 328, Subpart B of the FDIC Rules and Regulations titled False Advertising, Misrepresentation of Insured Status, and Misuse of FDIC Name or Journal, may apply to non-banks, such as crypto companies. As a result, insured banks should consider whether their third-party risk management policies and procedures effectively manage crypto-asset risks, including compliance risks related to Part 328, Subpart B.
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