FDIC Issues Advisory on Deposit Insurance and Crypto Currency

By River Mullan September 8, 2022

Co-authored by Krystal Martin and Pawel Wilczynski.

As a result of volatility in the cryptocurrency market, some cryptocurrency companies have suspended withdrawals or halted operations. Further, in select cases, these cryptocurrency companies have made misrepresentations to their customers that their products are eligible for FDIC deposit insurance coverage.

This has led the Federal Deposit Insurance Corporation (FDIC) to grow concerned about consumer confusion regarding cryptocurrency assets offered through, or in connection with, insured institutions. This risk of confusion is elevated when a non-bank entity offers cryptocurrency assets to the non-bank’s customers, while also offering an insured bank’s deposit products. To combat this, on July 29, 2022, the FDIC issued an advisory regarding deposit insurance as it relates to cryptocurrency companies. Within the advisory, the FDIC clarifies when FDIC deposit insurance applies, what products are insured, and how insured institutions should address the risks related to this confusion.

By federal law, the FDIC only insures products held in accounts (checking, savings, certificates of deposit, etc.) managed by participating, insured institutions. It specifically does not apply to financial products such as securities, commodities, and crypto assets. Further, the FDIC does not provide insurance against the default, insolvency, or bankruptcy of non-bank entities, including these cryptocurrency companies.

The FDIC encourages insured institutions to create a risk management and governance framework to control risks related to third-party relationships, especially those with cryptocurrency companies. Within this framework, controls should be put into place to confirm and monitor that these companies do not misrepresent the availability of deposit insurance and act appropriately to address such misrepresentations. This framework should include:

• Regularly reviewing and monitoring the non-bank’s marketing materials and related disclosures for accuracy and clarity and to ensure that these third parties’ communications regarding deposit insurance clearly:
  • state that they are not an insured institution;
  • identify the insured institutions where any customer funds may be held on deposit; and
  • communicate that crypto assets are not FDIC-insured products and may lose value; and
• Regularly reviewing and monitoring the insured institution’s own risk management policies and process to ensure that any services provided by, or deposits received from any third party, including a cryptocurrency company are, and remain, in compliance, with all laws and regulations.

It is up to each insured institution to hold the cryptocurrency companies they have relationships with accountable and report suspected misrepresentations regarding deposit insurance to the FDIC-maintained portal. For more information and specific details on the standards outlined in this rule, visit the FDIC website.