FDIC Warns Banks on Crypto-Related Deposit Insurance Customer Confusion
On July 29, the FDIC issued an advisory to FDIC-insured financial institutions regarding deposit insurance and dealings with cryptocurrency companies. The FDIC also issued an accompanying fact sheet for consumers regarding FDIC deposit insurance and cryptocurrency companies.
The FDIC is concerned about the risks of consumer confusion or harm arising from crypto assets offered in connection with insured depository institutions and whether consumers are being misled regarding the availability of deposit insurance. The FDIC believes that the risks are elevated when a non-bank entity offers crypto assets to the non-bank’s customers, while also offering an insured bank’s deposit products. The FDIC warned that banks that partner with cryptocurrency companies should ensure that any communications about deposit insurance are accurate and do not misrepresent the availability of deposit insurance.
The advisory and fact sheet each clarify what the FDIC perceives as a principal point of confusion, that customers may believe that they are protected against default or insolvency of cryptocurrency companies. The FDIC only pays deposit insurance after an insured bank fails. FDIC insurance does not protect a non-bank’s customers against the default, insolvency, or bankruptcy of any non-bank entity, including crypto custodians, exchanges, brokers, wallet providers, and neobanks.
The FDIC has long held concerns regarding customer confusion of the coverage of deposit insurance on retail sales of non-deposit investment products. Existing FDIC guidance requires clear and conspicuous disclosures that such products are not FDIC-insured, not bank-guaranteed, and are subject to investment risks and loss of principal.
Although the advisory was directed at insured banks, cryptocurrency companies should pay heed to it as well. The advisory came one day after the FDIC and the Federal Reserve issued a cease-and-desist letter to Voyager Digital, a crypto firm that filed for bankruptcy in July, to stop any marketing or promotions that suggested FDIC insurance applies to cryptocurrency holdings.
In the advisory, the FDIC states that cryptocurrency companies that advertise or offer FDIC-insured products in relationships with insured banks could reduce consumer confusion by clearly and conspicuously: (a) stating that they are not an insured bank; (b) identifying the insured bank(s) where any customer funds may be held on deposit; and (c) communicating that crypto assets are not FDIC-insured products and may lose value. The FDIC cautions that its regulations against misrepresentation of insured status and misuse of the FDIC name and logo can apply to nonbanks.