FDIC Advisory Reinforces Limits on Bank-Crypto Ties

Dive card:

• Federal Deposit Insurance Corp. (FDIC) issued an advisory Friday clarifying the boundaries within the relationship between crypto companies and the banks they rely on.
• The advisory came a day after the FDIC and Federal Reserve served Voyager Digital with a cease-and-desist order giving the bankrupt crypto platform two business days to remove any false and misleading statements regarding deposit insurance from the company’s website, mobile app, social media accounts, marketing, advertising and consumer-oriented text.
• An FDIC spokesperson said last month that the regulator was investigating Voyager’s consumer-facing language after the crypto platform’s banking partner, Metropolitan Commercial Bank, clarified that individual Voyager customer accounts are only eligible for deposit insurance if the bank — not Voyager — were to fail. .

Diving Insights:

In its Friday advisory, the FDIC reinforced Metropolitan’s point, saying it “only pays deposit insurance after an insured bank fails.”

“FDIC insurance does not protect a non-bank’s customers against the default, insolvency or bankruptcy of any non-bank entity, including crypto custodians, exchanges, brokers, wallet providers or … ‘neo-banks,'” the regulator wrote.

“Deposit insurance covers deposit products offered by insured banks, such as checking and savings accounts,” the FDIC clarified, adding that non-deposit products, such as stocks, bonds, money market funds, securities, commodities or crypto-assets, are not insured.

While Thursday’s order specifically targeted Voyager — and served as a warning to other crypto platforms — Friday’s advisory put banking partners on notice, stressing that “the risk is elevated when a non-bank entity offers crypto-assets to the non-bank’s customers, while also offering a insured bank’s deposit products.”

Banks must “assess, manage and control risks arising from all third-party relationships, including those with crypto companies,” the FDIC wrote on Friday. That means monitoring partners’ marketing materials and disclosures to ensure they don’t misrepresent the availability of deposit insurance — and addressing misrepresentations when they occur, the regulator wrote.

“Misrepresentations and customer confusion could cause concerned consumers with insured-bank relationships to move funds, which could result in liquidity risk for banks and, in turn, could potentially result in earnings and capital risk,” the FDIC wrote Friday.

Voyager last month suspended trading, deposits, withdrawals and loyalty rewards on its platform ahead of its filing for Chapter 11 bankruptcy protection. The company has approximately $1.3 billion in cryptocurrency on its platform and has more than $350 million in cash in a Metropolitan account for the benefit of its customers.

Customers with U.S. dollar deposits in their accounts “will be able to access those funds after a reconciliation and fraud prevention process is completed with Metropolitan Commercial Bank,” Voyager CEO Stephen Ehrlich wrote last month. But customers may have to wait longer to receive a held crypto. The company said it intends to transfer to customers a combination of crypto from their accounts, along with proceeds from the recovery of debt from hedge fund Three Arrows and shares in a reorganized Voyager.

In Thursday’s order, the FDIC took issue with any suggestion Voyager may have made that would have led the crypto platform’s customers to believe their deposits were insured — especially in the event of Voyager’s failure.

“Based on the information we have to date, it appears that the representations likely misled and were relied upon by customers who placed their money with Voyager and do not have immediate access to their money,” the FDIC wrote Thursday.

The Fed, Metropolitan’s primary regulator, also signed off on the order.

Reports last month of an FDIC investigation into Voyager’s language regarding deposit insurance came as news outlets noted recent, subtle tweaks to that wording.

“In the rare event that your USD funds are compromised due to the failure of the company or our banking partner, you are guaranteed a full refund (up to $250,000),” Voyager wrote in 2019, according to The Wall Street Journal.

As of Thursday, language on Voyager’s website reads: “Your USD is held by our banking partner, Metropolitan Commercial Bank, which is FDIC insured, so the cash you have with Voyager is protected.”

Another passage now reads: “Cryptocurrency held on the Voyager platform is not protected by FDIC insurance or any other government-sponsored or third-party insurance.”

A Voyager spokesperson last month told the Journal that the company’s disclosure statement was not new. A spokesperson for the crypto firm did not immediately comment to Bloomberg, Reuters or the Journal regarding Thursday’s letter.

The order comes about two months after the FDIC issued a final rule barring companies from making misrepresentations regarding deposit insurance or misusing the FDIC name or logo. Companies found in violation may be subject to enforcement, including fines.

A “prompt response” — due Monday — from Voyager would not prevent the FDIC from “taking any further action, as appropriate,” the regulator said. However, it allowed Voyager 10 days to gather all the documentation surrounding disputed deposit insurance-related language that the crypto firm claims is true.