Crypto customers need FDIC insurance
For years, cryptolender Voyager told customers that their deposits were insured by the Federal Deposit Insurance Corporation for up to $250,000. Then in July, the company filed for bankruptcy, and those customers found out the hard way that this wasn’t true: The FDIC hadn’t insured a dime of their money, and last week the agency asked Voyager to stop its “false or misleading representations.”
As it turned out, the FDIC only covered customer deposits at the bank where Voyager parked the dollars it collected from its own customers. And since that The bank has not gone bankrupt, Voyager customers received no protection. What’s “doubly worse,” says Jason Brett, a former FDIC employee who is now VP of crypto consulting firm Key Bridge Advisors, is that Voyager failed to designate accounts for each customer — meaning that if its FDIC-insured bank had failed, Voyager may have received $250,000 in total, and not a payment for each customer. Voyager did not respond to questions about this claim.
While the Voyager situation is particularly bleak, the reality is that the FDIC is not set up to stop some crypto company. On Friday, it asked banks to investigate statements from crypto companies that suggest otherwise. The result is that unlike traditional savers, millions of blockchain token owners have no backstop in the event of the crypto version of a bank failure. Will anything change in the wake of the current wave of crypto bankruptcies?
Why the FDIC is unlikely to insure crypto brokers
The US government created FDIC insurance in 1933 to protect depositors from bank runs. Under this regime, the government corporation takes over banks just before they fail — “usually on a Friday,” a spokesman says, to minimize panic when FDIC employees swarm the place, fire the boss, and reopen the bank in the following manner. morning. The FDIC funds such operations and insures customers by drawing on insurance premiums paid by banks, and may also turn to US government bailouts if those reserves run out.
In its Friday announcement, the FDIC stated that it “only insures deposits held in insured banks and savings associations” that pass the agency’s muster — it “does not insure assets issued by non-bank entities, such as crypto companies.”
Julie Hill, a law professor at the University of Alabama, isn’t surprised. She doesn’t expect FDIC insurance to cover crypto-company failures anytime soon, nor cryptocurrency deposits themselves. “The problem is [crypto’s] the value is volatile,” she says—the FDIC is no more likely to insure against crypto than it would against stocks or mutual funds. “It does not fit neatly with how deposit insurance works, and has for [close to] 100 years.”
Meanwhile, the FDIC umbrella is limited to US dollars – meaning deposits of stablecoins like USDC, which are almost equivalent to a dollar, don’t count.
Hill is skeptical that such stablecoins—even if held in an FDIC-insured bank and backed by real US dollars—will one day fall under FDIC protection. Although stablecoins are marketed as US dollar equivalents, “they are not the same,” she says. “People kind of think that about money market funds — people get confused about all kinds of things about banking.”
Meanwhile, an FDIC spokesperson said there have been discussions within the federal government about how to treat crypto, but nothing has been decided.
Brett, the former FIDC employee, and Hill predict that the FDIC is likely to become more aggressive in policing requirements for FDIC insurance, or perhaps increasing capital requirements for banks that hold crypto funds — which could lead to banks taking on fewer crypto clients.
“Voyager undid everything that the FDIC has worked to establish since the Great Depression — to avoid panic — because they gave people the impression that they had FDIC insurance,” says Brett.
Self defense
The FDIC’s insurance is not the only way to protect consumer deposits. Cryptobanks can always find a solution by constructing their own private custody insurance. Such an arrangement would be similar to the FDIC, but without the promise that the Treasury Department would step in if the insurance pool ran dry. So far, it hasn’t happened in any coordinated capacity – except that wealthier players, like Sam Bankman-Fried, bailed out failing companies and their customers.
Perianne Boring, the president of the Chamber of Digital Commerce, a crypto trade organization, says “people would be open to” an industry-led insurance regime, “but I’m not aware of a specific regime that’s in the works at the moment.” Still, it would be preferable to FDIC insurance, she says. After all, crypto’s libertarian leaders are unlikely to view government as the lender of last resort. The Blockchain Assocation, an industry lobby group, declined to comment.
Then there are crypto-native banks. These include the exchange’s Kraken’s not-yet-operational “bank,” under construction in Wyoming since 2020, which claims it will back all the cryptocurrencies it holds with reserves under the close watch of Wyoming’s financial regulators. If this turns out to be the case, it likely won’t need FDIC insurance since, unlike traditional banks, it won’t rely on fractional shares (which make banks vulnerable to runs and collapses).
Then there’s the question of whether crypto customers – many of whom knowingly accept high risk in return for big returns – should be given the same protections as regular consumers in the first place.
“We already have banks,” says Hill. Crypto’s reward is inseparable from the risk, she says. The bottom line is that crypto is risky – if you want the FDIC to protect your money, keep it in a bank.
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