Crypto customers need FDIC protection. Will they find it?

For years, crypto lender Voyager has told customers that their deposits are insured by the Federal Deposit Insurance Corporation up to $250,000. Then in July, the company filed for bankruptcy and the customers found out that wasn’t true: The FDIC didn’t insure their money, and last week the agency asked Voyager to stop making false or misleading statements. .”

As it turned out, the FDIC only covered customer deposits on bank where Voyager deposited the dollars it collected from its own customers. And since that The bank was not destroyed, Voyager’s customers were not protected. The “double whammy”, says Jason Brett, a former FDIC employee who is now VP of crypto consulting firm Key Bridge Advisors, is that Voyager failed to select accounts for each customer – meaning that it was an FDIC-insured bank. he was failed, Voyager may have received $250,000 everything, not the fee for each customer. Voyager did not respond to inquiries about this.

As bad as the Voyager case is, the truth is that the FDIC is not set up to fix it. each one crypto company. On Friday, it told banks to monitor the crypto industry’s claims that it is not. The result is that, unlike traditional savers, the millions of blockchain token owners have no backstop if the crypto brand fails the bank. Given the high rate of crypto bankruptcy, will anything change?

Why the FDIC is unlikely to certify crypto brokers

The US government established the FDIC in 1933 to protect bank depositors. Under the rule, federal agencies take over banks before they fail — “usually on a Friday,” the spokesman said, to ease the panic when FDIC officials fill the facility, evict the boss and reopen the bank the next morning. . The FDIC supports such operations and protects customers through insurance premiums paid by the banks, and can also be supported by the US government as dry deposits.

Its Friday to announceThe FDIC states that it “only protects the deposits of insured banks and savings associations” provide what the organization wants – “does not guarantee assets provided by non-banking entities, such as crypto companies.”

Julie Hill, a law professor at the University of Alabama, isn’t surprised. They don’t expect FDIC insurance to cover the failure of crypto companies any time soon, or cryptocurrencies to fix themselves. “That’s the story [crypto’s] its value is volatile,” he says — the FDIC would no more insure against crypto than it would against stocks or real money. “It doesn’t fit well with how deposit insurance works, and it should [close to] 100 years.”

At the moment, the FDIC’s umbrella is limited to US dollars – meaning that stablecoins like USDC, which are equal to one dollar, don’t count.

Hill suspects that fixed income – even if it is held in an FDIC-insured bank and backed by real US dollars – will one day fall under FDIC protection. Although stablecoins are to be sold as a currency equivalent to the US dollar, “it’s not the same,” he says. “People believe that when it comes to investing – people are confused by all kinds of banks.”

Meanwhile, a spokesperson for the FDIC said that there have been discussions within the federal government about how to handle crypto but nothing has been decided.

Brett, a former FIDC employee, and Hill predict that the FDIC will be more aggressive in policing the FDIC’s insurance policies, or increasing the requirements for banks that have crypto-currencies—which will make banks take fewer crypto customers.

“Voyager took away everything that the FDIC has been working on since the Great Depression – avoiding panic – because it gave people the impression that they were insured by the FDIC,” says Brett.

Self defense

FDIC insurance, however, is not the only way to protect consumer deposits. Crypto banks can always find a way to work by creating their own, private insurance. Such a plan will be similar to the FDIC but without the promise that the Treasury Department will intervene if the insurance pool runs out. But so far, this has not been done in concert – except for wealthy players, such as Sam Bankman-Fried, bailing out failing companies and their clients.

Perianne Boring, president of the Chamber of Digital Commerce, a crypto trade organization, says that “people may be open to” industry-led insurance, “but I don’t know about the government’s actions at this time.” However, it would be better for FDIC insurance, he says. After all, libertarian crypto leaders cannot look to the government as the lender of last resort. The Blockchain Association, an industry advocacy group, declined to comment.

Then there are crypto-native banks. This includes the Kraken “bank” that is not yet operational, is under construction in Wyoming starting in 2020, which states that it will return all crypto-assets with reserves under the supervision of Wyoming financial regulators. If this were to happen, it would not require FDIC insurance since it would not, unlike traditional banks, rely on depositors (which makes the banks vulnerable to foreclosure and collapse).

Then there is the question of whether crypto customers—many of whom are willingly accepting the risk of repatriating foreign currency—should receive the same protections as ordinary consumers in the first place.

“We already have banks,” says Hill. Crypto’s reward is inseparable from its risk, he says. The bottom line is that crypto is risk – if you want the FDIC to protect your money, keep it in a bank.

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