- The Federal Deposit Insurance Corp. (FDIC) issued an advisory Friday clarifying boundaries inside relationships between crypto firms and the banks on which they rely.
- The advisory got here a day after the FDIC and the Federal Reserve despatched Voyager Digital a cease-and-desist order giving the bankrupt crypto platform two enterprise days to take away any false and deceptive statements concerning deposit insurance coverage from the corporate’s web site, cellular app, social media accounts, advertising, promoting and consumer-facing textual content.
- A spokesperson for the FDIC mentioned final month the regulator was investigating Voyager’s consumer-facing language after the crypto platform’s banking associate, Metropolitan Commercial Bank, clarified that particular person Voyager buyer accounts are solely eligible for deposit insurance coverage if the financial institution — not Voyager — have been to fail.
In its Friday advisory, the FDIC strengthened Metropolitan’s level, 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 … ‘neobanks,’” the regulator wrote.
“Deposit insurance covers deposit products offered by insured banks, such as checking accounts and savings accounts,” the FDIC clarified, including that non-deposit merchandise, reminiscent of shares, bonds, cash market mutual funds, securities, commodities or crypto belongings usually are not insured.
While Thursday’s order focused Voyager particularly — and served as a warning to different crypto platforms — Friday’s advisory put banking companions on discover, emphasizing that “risks are elevated when a non-bank entity offers crypto assets to the non-bank’s customers, while also offering an 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 Friday. That means monitoring their companions’ advertising supplies and disclosures to make sure they don’t misrepresent the provision of deposit insurance coverage — and addressing misrepresentations after 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 to banks and, in turn, could potentially result in earnings and capital risks,” the FDIC wrote Friday.
Voyager final month suspended buying and selling, deposits, withdrawals and loyalty rewards on its platform forward of submitting for Chapter 11 chapter safety. The firm has roughly $1.3 billion in cryptocurrency on its platform and holds greater than $350 million in money in a Metropolitan account for the profit of clients.
Clients with U.S. greenback deposits of their accounts “will receive access to those funds after a reconciliation and fraud prevention process is completed with Metropolitan Commercial Bank,” Voyager CEO Stephen Ehrlich wrote final month. But clients might have to attend longer to obtain any held-up crypto. The firm mentioned it intends to cross to clients a mixture of crypto from their accounts, together with proceeds from a restoration of debt owed by hedge fund Three Arrows and shares of a reorganized Voyager.
In Thursday’s order, the FDIC took challenge with any allusion Voyager might have made that might have led the crypto platform’s clients to consider their deposits have been insured — particularly within the occasion 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 funds with Voyager and do not have immediate access to their funds,” the FDIC wrote Thursday.
The Fed, Metropolitan’s main regulator, additionally signed on to the order.
Reports final month of an FDIC investigation into Voyager’s language regarding deposit insurance coverage got here as information retailers famous latest, delicate tweaks to that wording.
“In the rare event your USD funds are compromised due to the company or our banking partner’s failure, you are guaranteed a full reimbursement (up to $250,000),” Voyager wrote in 2019, in accordance with The Wall Street Journal.
As of Thursday, language on Voyager’s web site reads: “Your USD is held by our banking partner, Metropolitan Commercial Bank, which is FDIC insured, so the cash you hold with Voyager is protected.”
Another passage now reads: “Cryptocurrency held on the Voyager Platform is not protected by FDIC insurance or any other government-backed or third party insurance.”
A Voyager spokesperson final month instructed the Journal the corporate’s disclosure assertion wasn’t new. A spokesperson for the crypto agency didn’t instantly remark to Bloomberg, Reuters or the Journal concerning Thursday’s letter.
The order comes roughly two months after the FDIC issued a closing rule barring firms from making misrepresentations concerning deposit insurance coverage or misusing the FDIC identify or brand. Companies present in violation could also be topic to enforcement actions together with fines.
A “prompt response” — due Monday — by Voyager wouldn’t stop the FDIC from “taking any further action, as appropriate,” the regulator mentioned. It did, nevertheless, permit Voyager 10 days to collect any documentation surrounding disputed deposit insurance-related language the crypto agency argues is true.