Why FDIC Sent Cease & Desist to FTX, 4 Other Crypto Firms – Ledger Insights

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 seen the criticism of FTX as harsh, with FTX US CEO Brett Harrison responding: “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 censored 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 some may not distinguish cryptocurrency from other currencies. Therefore, any statement relating to cash holdings in FDIC-insured bank accounts could easily be misinterpreted by a less informed reader as including cryptocurrencies. Recent bankruptcies provide context, notably crypto lender Celsius, which has severely affected retail investors.

In late July, the FDIC published a crypto fact sheet to clarify that it does not insure any crypto firms. If a crypto firm holds cash in an FDIC-insured bank, which only insures the cash from the bank’s bankruptcy, not the crypto firm’s bankruptcy, a difference many will not appreciate. When a company states that it has balances at an FDIC-insured bank, it must also explicitly state which bank.

In the FTX case, two tweets from FTX US CEO Brett Harrison state that “direct deposits from employers to FTX US are held in individual FDIC-insured bank accounts in the user’s name” and “shares are held in FDIC-insured and SIPC- insured brokerage accounts.” The latter refers to FTX’s expansion into share trading at the end of 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 times remain, in accounts at unnamed FDIC-insured banks, that brokerage accounts with FTX US are FDIC-insured and that FDIC insurance is available for cryptocurrency or stocks.”

The tweet related to employers has been removed, as has one related to brokerage, but as of today there is still at least one published tweet related to stockbroking. However, the wording is a little clearer, but does not address all of the FDIC’s complaints. It says, “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 the bankrupt crypto lender Voyager over its claims that cash held by Voyager in FDIC-insured bank accounts was insured against Voyager’s bankruptcy. Without verifying the details, where cash is held in a bank on trust, the segregation of funds from the bankrupt company may provide protection in the event of bankruptcy, not the FDIC. Voyager also didn’t always mention which bank it was working with in every case (although it sometimes did).

The brevity of social media has proven difficult when it comes to compliance with regulations, including self-regulation. In the UK, the Advertising Standards Association (ASA) censured football club Arsenal for not including adequate risk warnings in every cryptocurrency post on social media. A US advertising body censured celebrities for insufficient disclosures about their affiliation with NFTs they promote.

Another current topic is how FDIC insurance will work with tokenized bank deposits. It’s one thing if a single bank tokenizes money in its own accounts. But some potential gray areas exist where tokens are used for interbank payments – such as the USDF or TassatPay’s digital interbank network.