On Friday, the Federal Deposit Insurance Corporation (FDIC) announced that it had issued cease and desist letters to five cryptocurrency firms, including crypto exchange FTX US.
Some have viewed the censure on FTX as harsh, and FTX US CEO Brett Harrison responded, “We really didn’t mean to mislead anyone, and we didn’t suggest that FTX US itself, or that crypto/non-fiat assets, benefit from FDIC insurance.” It was an omission highlighted below that was partly to blame.
The other organizations censured included three media websites that referred to FDIC-insured crypto companies (cryptonews.com, smartasset.com, cryptosec.info) and one that registered a domain name fdiccrypto.com.
A key issue when dealing with consumers is that a few might not differentiate cryptocurrency from other currencies. Hence any statement relating to cash balances being held in FDIC-insured bank accounts could easily be misinterpreted by a less informed reader as including cryptocurrencies. Recent bankruptcies provide context, especially crypto lender Celsius, which has severely impacted retail investors.
At the end of July, the FDIC published a crypto fact sheet to clarify that it does not insure any crypto firms. If a crypto firm holds cash balances at an FDIC-insured bank, that only safeguards the cash from the bank’s bankruptcy, not the crypto firm’s bankruptcy, a difference many won’t appreciate. Also, when a company states that it has balances held at an FDIC-insured bank, it has to clarify which bank explicitly.
In the FTX case, at issue are two tweets from FTX US CEO Brett Harrison that state, “direct deposits from employers to FTX US are stored in individually FDIC-insure bank accounts in the user’s names” and “stocks are held in FDIC insured and SIPC-insured brokerage accounts.” The latter refers to FTX’s expansion into stock trading in late July.
Referring to this set of tweets, the FDIC letter said, “These false and misleading statements represent or imply that FTX US is FDIC-insured, that funds deposited with FTX US are placed, and at all time remain, in accounts at unnamed FDIC insured banks, that brokerage accounts at FTX US are FDIC-insured and that FDIC insurance is available for cryptocurrency or stocks.”
The tweet relating to employers has been removed, as has one relating to brokerage, but as of today, there is still at least one published tweet relating to stock brokerage. However, the wording is slightly clearer but doesn’t address all the FDIC’s complaints. It states, “brokerage accounts are SIPC-insured, cash associated with brokerage accounts is managed into FDIC-insured accounts at our partner bank”. But the tweet omits the required name of the partner bank.
The FDIC previously censured bankrupt crypto lender Voyager over its claims that cash amounts held by Voyager in FDIC-insured bank accounts were insured against Voyager’s bankruptcy. Without verifying the details, where cash amounts are held in a bank on trust, the segregation of funds from the bankrupt company can provide protection in the case of bankruptcy, not the FDIC. Voyager also didn’t always mention which bank it partnered with in all cases (although it did sometimes).
The brevity of social media has proven tricky when it comes to regulatory compliance, including self-regulation. In the UK, the Advertising Standards Association (ASA) censured the Arsenal football club for not including sufficient risk warnings in each and every cryptocurrency social media post. A U.S. ad body censured celebrities for insufficient disclosures about their association with NFTs they promote.
Another topical issue is how FDIC insurance will work with tokenized bank deposits. It’s one thing if a single bank tokenizes money held in its own accounts. But some potential gray areas exist where the tokens are used for interbank payments – such as USDF or TassatPay’s Digital Interbank Network.