Deposit Insurance & Cryptocurrency

Recently the FDIC issued a financial institution letter (FIL-35-2022)which includes an Advisory to regarding deposit insurance and crypto companies. The advisory mainly addresses misrepresentations about FDIC deposit insurance by crypto companies, but also applies to insured depository institutions that may have relationships with crypto companies. Additionally, a consumer Fact Sheet has been posted to provide additional information about deposit insurance coverage.

As the advisory reminds us, FDIC insurance only pays in the unlikely event of an insured-bank failure. Coverage is only available for the deposits that are held in the insured bank at the time of its failure. FDIC deposit insurance covers deposit products offered by insured banks, such as checking accounts and savings accounts, and certificates of deposit.Deposit insurance does not apply to non-deposit products, such as stocks, bonds, money market mutual funds, securities, commodities, or crypto assets. FDIC deposit insurance does not protect against losses due to theft or fraud, which are addressed by other laws.

The FDIC protects depositors of insured banks against the loss of their deposits, up to at least $250,000. Since the FDIC began insuring deposits in 1934, no depositor has lost a penny of FDIC-insured funds as a result of an insured bank’s failure. 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 are similar to banks but are not.

As part of the advisory, the FDIC advises insured banks to be aware of how FDIC insurance operates and the need to assess, manage, and control risks arising from crypto companies along with other third-party relationships. Banks should confirm and monitor that these companies do not misrepresent the nature or availability of deposit insurance and should take appropriate action to address any misrepresentations.

Communications related to deposit insurance need to be clear and well understood. Non-bank entities, such as crypto companies, that advertise or offer FDIC-insured products in relationships with insured banks could reduce consumer confusion by doing the following: 1) stating that they are not an insured bank; 2) identifying the insured bank where customer funds may be held on deposit; and 3) explaining that crypto assets are not FDIC insured and may lose value. To that end, banks can help minimize harm and confusion by regularly reviewing and monitoring the nonbank’s marketing material and relevant disclosures to ensure accuracy and clarity.

Banks should have appropriate risk-management policies and processes in place to ensure that services provided by, or deposits received from crypto companies (or other third parties) are in compliance with applicable laws and regulations.

Additionally, the FDIC’s rules and regulations regarding false advertising, misrepresentation of insured status, and misuse of the FDIC’s name or logo (found at 12 CFR § 328.100ff), can apply to non-banks, such as crypto companies. Therefore, insured banks should determine if its third-party risk management policies and procedures effectively manage crypto-related risks, including compliance risks related to the false advertising, misrepresentation and misuse addressed in the FDIC rules and regulations.