Why Fintechs and Crypto Companies Should Pay Attention to the FDIC’s Latest Round of Cease-and-Desist Letters | Husch Blackwell LLP

On February 15, the Federal Deposit Insurance Corporation (FDIC) issued a new round of cease-and-desist letters requiring companies to stop making false and misleading statements regarding deposit insurance coverage. The FDIC sent letters to a cryptocurrency exchange, crypto rating websites and (notably) a non-crypto fintech that offers high-yield deposit accounts. In addition to making false or misleading statements, the FDIC alleged that the crypto exchange and fintech violated a new FDIC rule by failing to identify the insured depository institution(s) in which customers’ funds may be placed when making claims for deposit insurance. This round of cease-and-desist letters could signal that the FDIC’s scrutiny of deposit insurance requirements is expanding beyond crypto-related businesses.

Deposit insurance requirements from crypto-related businesses

The FDIC sent three of its four cease-and-desist letters to a crypto exchange and two crypto information websites that reviewed the exchange. In its letter to the exchange, the FDIC highlighted the following problematic statement on the exchange’s website: “US dollars held in your [exchange] fiat currency wallet is FDIC insured up to $250,000 per account.” According to the FDIC, this statement is false or misleading in violation of the Federal Deposit Insurance Act (FDI Act) because the FDIC does not insure any cryptocurrency exchange. The two crypto rating websites received cease-and-desist -letter to repeat largely the same demand for deposit insurance in articles that passed the exchange.

In the cease-and-desist letter to the crypto exchange, the FDIC also noted that the exchange failed to identify the insured depository institution(s) in which customers’ funds may be placed when making the claim that the wallet is FDIC-insured. This omission violated the new false advertising, misrepresentation of insured status, and misuse of the FDIC name or logo rule, which the FDIC finalized in May 2022.

Within 15 days of receiving the letter, the cryptocurrency exchange and rating websites must remove all statements and references in customer-facing materials (including social media accounts) suggesting that (i) the exchange is FDIC insured, (ii) any funds held. in cryptocurrency is protected by FDIC insurance, and (iii) FDIC insurance provides protection or coverage in a manner or manner other than as provided in the FDI Act. The cryptocurrency exchange must also clearly and accurately identify the nature and extent of FDIC insurance available with the products. Finally, when making an FDIC insurance claim, the exchange must identify the insured depository institution or institutions with which the exchange has a direct or indirect relationship for the placement of deposits and into which customers’ funds may be deposited.

Deposit insurance requirements from fintech

A fintech that offers deposit accounts with an eye-popping 3% monthly interest rate also received a cease-and-desist letter from the FDIC, which provided the following examples of problematic deposit insurance statements on the fintech website:

• “With a minimum of $500 and no maximum, your deposits are FDIC insured.”
• In an FAQ that asked “How safe is this,” Fintech replied, “FDIC www.fdic.gov LEGAL DIVISION Federal Deposit Insurance Corporation (Federal Deposit Insurance Corporation) insures our accounts up to $250,000.”
• In an FAQ that asks “What will happen to my funds if [the Fintech] Collapse,” Fintech replied, “as long as our total value of accounts does not exceed FDIC limits, you will not lose any part of your funds if [the Fintech] collapse.”

According to the FDIC, these statements indicated or implied that the fintech itself is FDIC insured, that funds deposited with the fintech will be insured by the FDIC without a maximum limit, and that FDIC insurance will provide protection in the event of fintech failure. – statements that the FDIC purports to be false or misleading in violation of the FDI Act.

Like the crypto exchange, the FDIC noted that the fintech failed to identify the insured depository institution(s) with which the fintech has a direct or indirect deposit placement relationship and in which customer funds may be placed when the fintech made FDIC insurance claims. In addition to prohibiting false and misleading statements, the FDIC ordered fintech to identify such insured depository institutions and to clearly and accurately describe the nature and extent of deposit insurance with the products whose pass-through FDIC insurance is available.

What this means for you

The FDIC issued these cease-and-desist letters pursuant to the FDI Act, which prohibits any person from representing or implying that an uninsured product is FDIC-insured or from knowingly misrepresenting the extent and manner of deposit insurance. This prohibition applies to any person and primarily affects non-banks that are not insured by the FDIC. In addition to cease-and-desist letters, the FDIC may assess civil monetary penalties for false or misleading statements regarding FDIC insurance coverage.

The FDIC’s latest round of cease-and-desist letters follows another batch sent in August 2022 to five crypto-related companies, including the now infamous FTX. At the time of the first cease-and-desist letters, the FDIC had warned of an increase in deposit insurance failures that jeopardized the integrity of the FDIC insurance system and created consumer harm.

The latest round of letters could signal that the FDIC’s scrutiny of deposit insurance requirements is expanding beyond crypto-related companies to non-bank fintechs and product review sites more generally. The letters also prove that the FDIC is monitoring compliance with its new false advertising, misrepresentation of insured status, and misuse of the FDIC name or logo rule. The rule includes a process for the public to report suspected violations to the FDIC and could put more companies on the FDIC’s radar. Non-banks and review sites should prioritize investigating any deposit insurance claims it makes to consumers.

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