How the FDIC works and why crypto marketers should be nervous

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And suddenly, like a warm Santa Ana wind on an extreme fire danger day, everyone finds themselves talking about the FDIC (Federal Deposit Insurance Corporation).

For anyone who doesn’t bank in the United States, the FDIC, which was established in 1933 in the wake of The Great Depression, ensures (and insures) that anyone who deposits cash in a federally insured bank is entitled to a certain threshold of cash in the event that the bank fails.

The FDIC — actually composed of two agencies, the Federal Deposit Insurance Corporation and the National Credit Union Administration — is not funded by public taxation but instead operates the same way as any insurance company: clients (in this case, banks) make regular payments to the insurance fund to cover their assets (in this case, the bank’s customers) in the event of a catastrophe.

The regular payments cover just about all of the expenses of the FDIC, including employee salaries and banking compliance procedures.

The FDIC doesn’t insure stocks, bonds, or other possibly high-yielding assets, but instead only cash in bank or brokerage accounts. While the FDIC has suffered through extreme market conditions and was forced to utilize operational alternatives to its normal services in previous financial meltdowns (Washington Mutual being the shining example), no one fully covered by FDIC insurance has ever lost a penny in nearly 100 years of operation.

Understanding how and why the FDIC exists is important to fully comprehend why it’s abruptly being discussed in cryptocurrency circles — particularly in regard to the now bankrupt Voyager Digital and the cryptocurrency exchange FTX US.

To be clear: The FDIC doesn’t insure digital assets, even stablecoins (blockchain assets pegged to a real-world asset like the dollar or an ounce of gold). So it raised a few eyebrows that Voyager, until going bankrupt, was making claims that it was FDIC insured.

Financial lies and the consequences

The problem with lying about being FDIC-insured is that it affects companies less than their customers. More often than not the realization only occurs once the FDIC insurance would prove to be useful, which was the case with Voyager Digital.

It’s not easy to summarize how Voyager Digital ended up going bankrupt, but essentially the company was owed hundreds of millions of dollars from a now bankrupt investment firm called Three Arrows Capital (3AC). This hole in the balance sheet forced Voyager Digital to acknowledge that its remaining funds couldn’t cover customer deposits.

This, of course, has dramatically altered the lives of many customers who had placed their life savings into the company believing that even under the worst circumstances they’d be protected. Now, these individuals will have to wait to see what percentage of their money they’ll be able to claw back, with no idea of when they can expect to recover funds.

Cease and desist and more

Over the past two years, the FDIC has reached over 165 “informal resolutions” with companies and individuals making false claims about insurance coverage and helped get over 120 websites shut down for egregious financial lies. This is to suggest that the FDIC can and does enforce the rules and regulations laid down in the 1950 Federal Deposit Insurance Act.

Thankfully, the FDIC is able to stop some of the false claims before they get out of hand. For instance, the insurer issued cease-and-desist letters to five different cryptocurrency-related companies — including the well-known FTX US. The letter sent to FTX US included a mention of a tweet by Brett Harrison, president of FTX, which has been deleted. Harrison clarified that FTX “really didn’t mean to mislead anyone.”

Protos reached out to the FDIC and were told that “cryptocurrency is one of the top priorities for the acting chairman,” so perhaps more proactive action in the cryptocurrency industry is to be expected (and welcomed).

But what happens when someone decides to fight the FDIC on a cease and desist letter?

Well, every company or individual who receives a letter has roughly two weeks to respond if they believe that the letter was sent in error. Protos spoke with Corey Harris of CH’s Service Provider, which was also slapped with a cease and desist letter last week for registering the domain name FDICcrypto dot com.

The domain name still redirects to his website where, while there may be strange securities offerings and paper money plastered with Mr. Harris’ face, there’s no claim of FDIC insurance coverage. Mr. Harris also said that according to his own definition, FDIC stood for “Family Distribution in Cryptocurrency.”

But a cryptocurrency lawyer familiar with the matter told Protos that fighting the FDIC on an issue like this isn’t just an uphill battle, but could be much worse. “You cannot use misleading phrasing and everyone knows what (Harris) is doing with FDICcrypto,” the lawyer said. “If he continues to misrepresent the name of the FDIC there are hundreds of avenues available to pursue him, including passing information to the FTC or DOJ.”

Another lawyer directly quoted CFR 328.102 which states, “No person may represent or imply that any Uninsured Financial Product is insured or guaranteed by the FDIC by using FDIC-Associated Terms as part of any business name or firm name of any person,” adding that, “(Harris) just using the name ‘FDIC’ puts him in the scope of the rule.”

Falsehood flies and the truth comes limping after it

Unfortunately, the FDIC makes exceedingly clear in all of its press releases that it can’t flag every website, tweet, Facebook post, company, or person making false claims of being FDIC insured. This means that it’s up to retail customers and everyday inquisitive people to check for themselves.

If you’re ever curious as to whether or not a company or person that claims FDIC insurance is actually insured by the FDIC, do yourself a favor and check here. Lastly, if you want further guidance as to the role of the FDIC in the cryptocurrency industry they’ve gone ahead and already defined it for you.

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