No, your crypto is not FDIC insured

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When Canadian cryptocurrency broker and lender Voyager Digital filed for bankruptcy in July, it created some confusion among customers about their deposits and whether they were FDIC insured.

US regulated bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to a certain amount. This serves as a safeguard for customers in the event of isolated bank failures.

Are cryptocurrencies FDIC insured? Of course not.

Voyager executives had previously said that clients’ U.S. dollar funds would be FDIC insured. Those dollars, about $350 million in cash, were held in an omnibus account at the Metropolitan Commercial Bank of New York.

It is unclear whether the cryptocurrency firm represented to clients that assets beyond dollars were insured. But federal regulators felt it was a sensitive enough issue — given the circumstances that we’ll get to shortly — that it required some clarification. In a July 28 letter, the FDIC and the Federal Reserve Board demanded that Voyager cease and desist from making “false and misleading statements regarding its FDIC deposit insurance status and take immediate action to correct such prior statements.”

What were these allegedly false statements? That Voyager itself was FDIC insured or the customers’ crypto balances were FDIC insured? Neither of these would be true.

So US dollar deposits – of up to $250,000 per customer account – will be recoverable. Customers’ cryptocurrency deposits, which can amount to billions, are truly at risk. Customers may lose part of their crypto assets during the bankruptcy process.

Crypto giant FTX also created some confusion about a similar matter. In a July 20 tweet, FTX President Brett Harrison said clients could deposit their paychecks into FDIC-insured accounts in the clients’ names, and that stocks would be held in FDIC and Securities Investor Protection Corporation (SIPC) insured accounts.

This also prompted the FDIC to issue a cease-and-desist letter in August, requiring FTX to remove the tweet and correct any suggestion that FTX itself or other non-fiat currency amounts would be under FDIC protection.

And in addition, FTX had to clarify that stocks and securities are not insured by the FDIC, but have limited protection provided by the SIPC.

Celsius Network, the bankrupt decentralized finance (DeFi) lender that halted customer withdrawals in June, has also attracted government regulatory probes into its accounts. In its bankruptcy filing, Celsius revealed it owed customers more than $4.7 billion.

Although Celsius claimed no FDIC protection, founder and CEO Alex Mashinsky has attracted negative publicity for previously hinting at Celsius’ apparent safety and criticizing commercial banks.

In any case, these representations from crypto firms and regulatory responses underscore the current sensitivity surrounding crypto accounts and their security (or rather, the lack thereof).

These cryptocurrency firms embarked on aggressive marketing campaigns to attract depositors, luring them with high returns (interest rates several times higher than bank savings accounts) and a false promise of security. In reality, these DeFi institutions have likely engaged in risky lending and staking operations to meet these high promised interest payouts.

Consumers should be aware that no crypto asset under any circumstances or on any platform is ever insured by the FDIC or any other government agency. And even if a customer wasn’t misled about any deposit insurance – like myself, who also had some money locked up in the Celsius bankruptcy – investors need to ask how these improbably high returns are generated and whether they’re sustainable.

It is a question of performing due diligence on a counterparty with regard to the soundness of its business model. And even if the business model is sound or considered good for the foreseeable future, investors should stay abreast of developments. As for Celsius, the warning signs were there earlier this year when the broader crypto market began to deteriorate, and stablecoin TerraUSD collapsed.

And back to FDIC insurance – it’s interesting that modern leaders of an industry originally created by authority-shy libertarians now actively emphasize the stability provided by government agencies.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of the Epoch Times.

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Fan Yu is an expert on finance and economics and has contributed analysis on China’s economy since 2015.