Federal Deposit Insurance Corporation (FDIC)
The purpose of this blog post is to outline the regulatory guidance, actions and statements issued by the Federal Deposit Insurance Corporation (FDIC) relating to cryptocurrencies.
NOTE: Regulatory guidance in this area is rapidly evolving. As such, this blog post may not be entirely up to date. Please DYOR.
INTRODUCTION
The FDIC insures deposit accounts of retail banks and savings and loan associations up to $250,000. The purpose of the FDIC is to reduce the risk of depositor panic during economic downturns that may result in bank runs.
In 2021, the FDIC began examining the role that cryptocurrencies could play in a bank’s risk profile and how cryptocurrencies could contribute to a bank’s failure.
REGULATORY ACTION
In 2021, the FDIC requested information from banks and the public pertaining to: (1) digital asset services insured institutions are providing; (2) digital asset services that are most in demand from insured institutions; (3) the types of risks and risk management policies that apply to digital assets; (4) the operations (if any) being integrated with traditional banking systems; (5) the guidance needed from the FDIC; (6) the distinctions that apply to fiat-backed stablecoins and stored value products; and (7) the challenges that arise from the FDIC taking over digital assets as a receiver. Request for Information and Comment on Digital Assets
In an April 2022 letter, the FDIC required insured institutions to notify the FDIC about any cryptocurrency-related activities the institution may be engaged in, or intends to engage in. Notification of Engaging in Crypto-Related Activities.
Importantly, the letter noted that cryptocurrencies may pose “significant safety and soundness risks” and “financial stability and consumer protection concerns.” The letter then identified key risks, including, among others: (1) ownership identification, “including whether it is possible for ownership to be clearly validated and confirmed”; (2) risks of anti-money laundering / countering the financing of terrorism; (3) credit risk exposure; (4) market valuation/pricing; (5) liquidity risk, particularly due to volatility; (6) bank run risk on fiat assets backing crypto-assets; (7) consumer confusion regarding digital assets; and (8) consumer protection laws as they relate to cryptocurrencies.
Finally, the FDIC stated that once the requested information is received, the FDIC will provide “relevant supervisory feedback.”
STATEMENTS, GUIDANCE, ADVISORY LETTERS
FDIC Chairman Martin Gruenberg stated that “evaluating cryptocurrency risks” is among the FDIC’s top five 2022 priorities and that bank regulators should be ready to provide “robust guidance” to address the risks posed by cryptocurrencies to the financial system. Acting Chairman Martin J. Gruenberg Announces FDIC Priorities for 2022.
On July 28, 2022 the FDIC (jointly with the Federal Reserve Board), sent a letter to Voyager Digital LLC (“Voyager”) demanding that it “stop representing or implying that an uninsured deposit is insured."
By way of background, Voyager permitted its customers to deposit fiat currency and convert it to cryptocurrency more quickly by leveraging its relationship with a traditional bank, Metropolitan Commercial Bank (“Metropolitan”). Although Metropolitan provided Voyager’s services, Voyager represented itself as being as safe or safer than a bank (Voyager is now undergoing a Chapter 11 bankruptcy).
The FDIC claimed that Voyager overly relied on its relationship with Metropolitan (and by extension Metropolitan’s FDIC insured status). Specifically, the FDIC claimed that Voyager made various representations online (through its website, mobile app and social medial) suggesting that (A) Voyager was FDIC insured; (B) customers who invested with Voyager on its cryptocurrency platform would receive FDIC insurance for all their funds provided to, held by, on or with Voyager; and (C) the FDIC would insure customers against the failure of Voyager itself. Joint Letter Regarding Potential Violations of Section 18(a)(4) of the Federal Deposit Insurance Act.
One day later, the FDIC issued an advisory letter to all FDIC insured institutions cautioning them that they must be careful when dealing with such companies offering cryptocurrency services because of the risks of “consumer confusion or harm” arising from cryptocurrencies offered in connection with insured institutions. The FDIC also stated that insured institutions should monitor cryptocurrency companies to ensure that these companies do not misrepresent the availability of FDIC insurance to “measure and control” risks to the bank. Advisory to FDIC-Insured Institutions Regarding Deposit Insurance and Dealings with Crypto Companies.
In this same letter, the FDIC also provided guidance to cryptocurrency companies that they should not advertise that they offer FDIC insured products in relationships with insured banks in order to reduce consumer confusion.
Interestingly, the FDIC further asserted that it has regulatory authority over these cryptocurrency companies that are not FDIC insured under the statute governing "false advertising, misrepresentation of insured status, and misuse of the FDIC's name or logo." 12 C.F.R. § 328.100 (effective July 5, 2022).
On August 19, 2022, the FDIC issued five additional “cease and desist” letters to cryptocurrency companies for the same violations, including FTX. See FDIC Issues Cease and Desist Letters to Five Companies For Making Crypto-Related False or Misleading Representations about Deposit Insurance.
STABLECOIN REPORT
In November 2021, the FDIC, along with the Office of the Comptroller of the Currency (OCC), issued a report on the uses, risks and opportunities related to stablecoins. Report on Stablecoins.
As it relates to the FDIC, the report noted that depending on the structure of the stablecoin and its reserves, individual holders may or may not have FDIC insurance. For instance, for a stablecoin holder to qualify for FDIC insurance, the stablecoin issuer must “deposit fiat currency reserves at an FDIC-insured bank and do so in a manner that meets all the requirements for ‘pass-through’ deposit insurance coverage” under 12 C.F.R. § 330.5.
The report is discussed in greater detail in my earlier blog post.
STATEMENTS AND TESTIMONY
In late 2021, the FDIC indicated that in 2022 it plans to “provide greater clarity on whether certain activities related to crypto-assets conducted by banking organizations are legally permissible, and expectations for safety and soundness, consumer protection, and compliance with existing laws and regulations.” Joint Statement on Crypto-Asset Policy Sprint Initiative and Next Steps.
However, so far in 2022, the FDIC has not issued further guidance beyond that described above.
Former FDIC Chairman, Jelena McWilliams, made some statements early in 2022 that "banks’ engagement in [crypto markets] remains limited, despite substantial demand” and that the FDIC is considering whether “a stablecoin, or the funds represented by a stablecoin, meets the definition of ‘deposit’ . . . and . . . whether stablecoins could be eligible for deposit insurance.” Remarks at Bipartisan Policy Center.
Notably, McWilliams offered her opinion that “bank-issued stablecoins closely resemble digital representations of deposits” and encouraged the FDIC to provide more clarity to the public (possibly by amending the deposit insurance rules).
Finally, McWilliams cautioned that if stablecoins become “dominant” this could “lead to substantial sums of money migrating out of insured banks with significant ramifications for credit creation, financial stability, and bank funding.” To mitigate these risks, McWilliams suggested that the FDIC’s oversight should “rest on the foundation that stablecoins . . . are truly backed 1:1 by safe, highly liquid assets.”
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