FDIC issues cease and desist letters alleging false or misleading deposit insurance claims on crypto-related matters | JD Supra

On August 19, 2022, the FDIC issued cease and desist letters to five crypto companies, alleging that they made false and misleading statements about the FDIC’s deposit insurance policy and asking for immediate action. The five companies are FTX US, Cryptonews.com, CryptoSec.info, SmartAsset.com, and FDICCrypto.com. The FDIC’s action comes weeks after it issued “Advice to FDIC Insured Institutions Regarding Deposit Insurance and Dealing with Crypto Companies” to address the agency’s concerns about FDIC deposit insurance fraud.

According to FDIC certified photo,”[b]according to the evidence gathered. . ., each of these companies made false representations—including on their websites and social media accounts—that certain crypto-related products were FDIC-insured or that stocks held in brokerage accounts were FDIC-insured. The FDIC alleges that these representations violate the FDI Act, 12 USC § 1828(a)(4), and its implementing regulations, 12 CFR Part 328, Subpart B. Section 328 provides, among other things, that any person other than an insurance depository institution claims treatment by the FDIC insurance, they must identify the insurance depository place where the money is deposited; failure to do so is considered a miss. The final rule adds and revises Section 328 was approved by the FDIC in May 2022 and has been in effect since July 2, 2022.

The FDIC insures deposits in insured banks and savings associations in case of failure; it does not guarantee assets provided by non-banking entities, such as crypto companies. Section 18(a)(4) of the Federal Deposit Insurance Act (FDI Act) prohibits false advertising, misuse of FDIC names, and misrepresentation of insured status. Specifically, no one shall represent or imply that any deposit loan, obligation, certificate, or share is insured or guaranteed by the FDIC or misrepresent the extent of any insurance. In addition, there is a prohibition against using “Federal Deposit”, “Federal Deposit Insurance, “Federal Deposit Insurance Corporation”, or “FDIC” as a business term.

In letter dated August 18, 2022 sent to FTX US, the FDIC says Brett Harrison, President of FTX US, wrote on Twitter that “direct payments from employers to FTX US are held in FDIC-insured bank accounts in the names of users” and “stock are. held in an FDIC-insured account by SIPC. The FDIC also claims that FTX is identified as an “FDIC-Insured” cryptocurrency exchange on other websites, including Cryptosec.info, which also received a cease-and-desist letter. The FDIC demanded the immediate removal of any statements or representations. stating or implying that FTX US accounts or assets are FDIC insured. After receiving the letter, Harrison deleted the tweet and said the next tweet that he did not mean to say that crypto assets were insurance.

The letters sent to other companies, dated August 18, 2022, allege similar falsehoods and demand that they cease and desist immediately. For example, a letter sent to Cryptonews.com It says it has published reviews of cryptocurrency exchanges, including Coinbase, eToro, and Gemini, meaning they are FDIC-insured. Letters addressed to CryptoSec.info and SmartAsset.com they state that their website includes a link to “FDIC-Insured Crypto Exchanges” and says that this “means that the FDIC must protect your money from loss” and that “if you lose your money on deposit the FDIC will reimburse the loss up to the program cap.” Last letter it was sent to the person who registered the areas of the website including www.fdiccrypto.comin violation of the FDI Act’s prohibition against using the FDIC name or logo.

On July 28, 2022, the FDIC and the Federal Reserve Board issued a joint cease-and-desist letter to crypto brokerage firm Voyager Digital with similar charges. On the same day, in response to the failure of some crypto companies and the misconception of some customers that the crypto products they owned were FDIC insured, the FDIC issued a statement titled “What People Need to Know About FDIC Deposit Insurance and Crypto Companies.” The fact sheet includes links to consumer products and reviews of products and risks that are covered – and not covered – by deposit insurance.

At this time of uncertainty in the crypto market, we expect that the FDIC will do the same against other crypto companies that make similar representations to the ones that were written recently and leave letters. In addition to increasing enforcement by the FDIC under Section 328, the CFPB issued a Circular warning that misrepresentation of the FDIC name or logo may constitute fraud or a violation of the Consumer Financial Protection Act. Crypto companies and their affiliates must address their advertisements, websites, and other public disclosures to ensure that they do not state or imply that crypto assets are FDIC insured. Insured banks should also review the risk management and risk management practices established by the FDIC in the Advisory.

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