Deposit Insurance and Cryptocurrency Assets – What the FDIC Wants You To Know

On July 29, the Federal Deposit Insurance Corporation (FDIC) issued a Financial Institution Advisory Letter informing the general public that the FDIC does not insure assets issued by non-banking institutions, such as cryptocurrency companies. Even if the assets are offered through an FDIC-insured bank, the asset itself is not eligible for deposit insurance since it is issued directly by a non-bank entity (i.e. cryptocurrency exchange).

With the increased demand in the cryptocurrency space, customers have been led to (wrongfully) believe that assets offered by cryptocurrency companies are protected by FDIC deposit insurance coverage. The FDIC’s concern arises out of recent market turmoil that has resulted in the suspension of withdrawals or a halt in operations by some cryptocurrency companies. The purpose of the Advisory Letter is to 1) urge FDIC-insured banks to examine and manage the risks from all third-party relationships, including those with cryptocurrency companies, and 2) address certain misrepresentations made by cryptocurrency companies that may lead to confusion or harm to customers arising from offering cryptocurrency assets.

Five Points to Know

• Deposits of insured banks and savings associations (collectively “insured banks”) are insured by the FDIC. Assets issued by non-bank entities, such as cryptocurrency companies, are not insured by the FDIC.
• The FDIC insures deposit products offered by insured banks, such as checking accounts and savings accounts for up to 250,000 in the event that an insured bank fails.
• Deposit insurance does not apply to non-deposit products, which include stocks, bonds, money market mutual funds, securities, commodities, or crypto assets. Additionally, FDIC insurance does not protect against the default, insolvency, or bankruptcy of cryptocurrency exchanges, custodians, wallet providers, and other non-banking entities.
• To prevent customer confusion and harm, FDIC recommends to non-banking entities that advertise or offer FDIC-insured products in relationships with insured banks that 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.
• On the other hand, insured banks that are involved in relationships with non-bank entities that offer both deposit products and non-deposit products, such as crypto assets, can help minimize customer confusion and harm by carefully reviewing and regularly monitoring the nonbank entity’s marketing material and related disclosures to ensure accuracy and clarity.

Whether you are an FDIC-insured bank or a financial institution that is looking to accept or offer cryptocurrency, here are three things you should be doing now:

1. Identifying, developing, or enhancing policies and procedures to ensure that depositors are made fully aware that their non-bank issued assets will not be covered by federal deposit insurance;
2. Your financial institution’s highest governing body is ensuring that policies and procedures are being fully implemented and that these same policies and procedures are being tested to ensure they are being executed properly and risks are being identified; and
3. Employees of your financial institution are being provided with appropriate training with respect to these policies and procedures.

Clark Hill’s Financial Services Regulatory & Compliance Practice Group is a national leader in the field of financial services law. Our group can help you navigate this rapidly evolving regulatory environment by providing policy and strategic outreach to relevant stakeholders as well as governmental agencies that oversee the financial services industry. If you would like more information, please contact Joann Needleman or Ahmad Chamseddine.

This article and the information contained herein does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.