Following a cease-and-desist order Thursday against a crypto company now in bankruptcy, the Federal Deposit Insurance Corp. (FDIC) on Friday issued an advisory and fact sheet to insured institutions that warns of false claims of federal deposit insurance, the types of due diligence banks should exercise regarding crypto firms, and what the public needs to know about deposit insurance and crypto firms.
Thursday’s cease-and-desist order went to to Voyager Digital, LLC, which reportedly filed for Chapter 11 bankruptcy in July just weeks following the reported failure of crypto hedge fund Three Arrows Capital (3AC), which itself is said to have defaulted on a loan to Voyager. The federal bank insurer said that Voyager had been making statements online to its customers that their funds with Voyager were protected by federal deposit insurance when they were not. Meanwhile, Voyager customers do not have access to their funds.
The FDIC on Friday transmitted its advisory and fact sheet to insured institutions via a Financial Institution Letter (FIL-35-2022). A couple key points from the advisory to insured institutions include:
- When FDIC deposit insurance applies. In the unlikely event of an insured-bank failure, the FDIC protects depositors of insured banks against the loss of their deposits, up to at least $250,000. 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, or other entities that appear to mimic banks but are not, called “neobanks.”
- What products are FDIC 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 FDIC advisory reminds insured banks that they need to be aware of how FDIC insurance operates and need to assess, manage, and control risks arising from third-party relationships, including those with crypto companies (in this case, the crypto firm had a deposit account in a federally insured bank). It adds, among other things, that in dealings with crypto companies, FDIC-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.
The fact sheet gives a brief background on recent events involving crypto firms, key points about FDIC deposit insurance, and what types of products and risks are not covered by deposit insurance.