FDIC Issues Notice on Deposit Insurance and Crypto Assets | Ballard Spahr LLP

The FDIC has issued a “Notice to FDIC-Insured Institutions Regarding Deposit Insurance and Transactions with Crypto Companiesto address the agency’s concerns about misrepresentations regarding FDIC deposit insurance by some crypto companies. The FDIC is particularly concerned that consumer confusion or harm may arise from crypto assets offered by , through or in connection with an insured bank, particularly where a non-bank offers crypto assets to its customers while also offering an insured bank’s depository products.

The FDIC’s concern stems from recent market turmoil that led to some crypto companies suspending withdrawals or halting operations. According to the FDIC, “These companies have told their customers that their products are eligible for FDIC deposit insurance coverage, which may lead customers to believe, erroneously, that their money or investments are safe. “.

The first part of the notice deals with risks and concerns. The FDIC identifies two issues that can confuse customers. The first issue is when FDIC deposit insurance applies. The FDIC states that FDIC deposit insurance does not protect non-bank customers against the default, insolvency, or bankruptcy of any non-bank, including crypto custodians, exchanges, brokers, wallet providers or other entities that appear to imitate banks but are not, referred to as “neobanks”. The second question is which products are FDIC insured. The FDIC advises that FDIC deposit insurance covers deposit products offered by insured banks, but does not apply to non-deposit products, such as stocks, bonds, mutual funds money market, securities, commodities or crypto-assets.

The FDIC observes that in addition to potential harm to consumers, customer confusion can lead to legal risks for banks if a crypto company, or other third-party partner of an insured bank, makes false statements about the nature and the scope of deposit insurance. It also identifies liquidity risk for banks, which can potentially result in profits and capital risk, if misrepresentation and customer confusion lead affected consumers to transfer funds from insured banks.

The second part of the advice deals with risk management and governance considerations. These considerations consist of the following:

  • Insured banks must assess, manage and control the risks arising from all relationships with third parties, including those with crypto companies.
  • Insured banks should confirm and monitor the crypto companies they do business with to ensure that these companies do not misrepresent the availability of deposit insurance, and should take appropriate action to remedy any misrepresentation.
  • Communications related to deposit insurance should be clear and visible. Non-banks, such as crypto companies, that advertise or offer FDIC-insured products through relationships with insured banks could reduce consumer confusion by: (a) stating that they are not not an insured bank; (b) identify the Insured Bank(s) where Client Funds may be held on deposit; and (c) communicate that crypto-assets are not FDIC-insured products and may lose value.
  • Insured banks that are involved in relationships with non-banks that offer deposit products as well as non-deposit products, such as crypto assets, can help minimize customer confusion and harm by carefully reviewing and Regularly monitoring non-bank marketing materials and related disclosures. to ensure accuracy and clarity. (Although not specifically stated by the FDIC, the FDIC would likely expect this review and oversight to include whether a non-bank partner has taken the steps suggested by the FDIC to reduce consumer confusion.)
  • Insured banks must have appropriate risk management policies and processes in place to ensure that all services provided by or deposits received from any third party, including a crypto company, comply with all laws and regulations.
  • Because youThe FDIC Rules on Misrepresentation of Insured Status may apply to non-banks, such as crypto companies, insured banks should consider whether their third-party risk management policies and procedures effectively manage crypto-asset risks, including compliance risks related to regulations.

[View source.]