FDIC issues advice on deposit insurance and crypto assets | Ballard Spahr LLP

The FDIC issued an “Advising FDIC-Insured Institutions Regarding Deposit Insurance and Transactions with Crypto Companies” to address the agency’s concerns about misrepresentations about FDIC deposit insurance by certain crypto companies. Of particular concern to the FDIC is the risk of consumer confusion or harm arising from crypto-assets offered by, through, or in connection with an insured bank, particularly when a non-bank offers crypto-assets to its customers while simultaneously offering insured bank deposit products.

The FDIC’s concern stems from the recent market turmoil that has caused some crypto companies to suspend withdrawals or suspend operations. According to the FDIC, “these companies have represented to their customers that their products are eligible for FDIC deposit insurance, which may mislead customers into believing that their money or investments are safe.”

The first part of the consultation deals with risks and concerns. The FDIC has identified two issues that can create confusion for customers. The first issue is when FDIC deposit insurance applies. The FDIC states that FDIC deposit insurance does not protect nonbank customers against the default, insolvency, or bankruptcy of any nonbank, including crypto custodians, exchanges, brokers, wallet providers, or other entities that appear to mimic banks but are not. , called “neo-banks”. The second issue is what products are insured by the FDIC. The FDIC states that FDIC deposit insurance covers deposit products offered by insured banks, but does not apply to non-deposit products such as stocks, bonds, money market mutual funds, securities, commodities or crypto assets.

The FDIC notes that in addition to the potential harm to consumers, customer confusion could 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 scope of deposit insurance. It also identifies liquidity risk for banks, which could potentially lead to profits and capital risk if misrepresentations and customer confusion lead concerned consumers to transfer funds from insured banks.

The second part of the consultation concerns 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 must verify and monitor the crypto companies they work with to ensure that these companies do not misrepresent the availability of deposit insurance, and must take appropriate action to address any misrepresentations.
  • Communications related to deposit insurance must be clear and visible. Non-banks, such as crypto companies, that advertise or offer FDIC-insured products in relationships with insured banks could reduce consumer confusion by clearly and conspicuously: (a) stating that they are not an insured bank; (b) identification of the insured bank(s) where the customer’s funds may be held on deposit; and (c) communicating that crypto assets are not insured by FDIC products and may lose value.
  • Insured banks that have 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. – the bank and related disclosures to ensure accuracy and clarity. (Although not expressly stated by the FDIC, the FDIC would likely expect such review and monitoring to include whether a non-bank counterparty has taken the steps suggested by the FDIC to reduce consumer confusion.)
  • Insured banks must have appropriate risk management policies and processes to ensure that all services provided by, or deposits received from, a third party, including a crypto company, comply with all laws and regulations.
  • Since tThe FDIC Misrepresentation of Insured Status Regulation may apply to non-bank entities such as crypto companies, insured banks should determine whether their third-party risk management policies and procedures effectively manage risks related to crypto assets, including compliance risks related to the regulation.

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