On August 19, 2022, the FDIC issued cease and desist letters to five crypto companies, alleging they made false and misleading statements about FDIC deposit insurance and demanding immediate corrective action. The five companies are FTX US, Cryptonews.com, CryptoSec.info, SmartAsset.com, and FDICCrypto.com. The FDIC’s actions come weeks after issuing an “Advisory to FDIC-Insured Institutions Regarding Deposit Insurance and Dealings with Crypto Companies” to address the agency’s concerns regarding misrepresentations about FDIC deposit insurance.
According to the FDIC’s press release, “[b]ased upon evidence collected . . ., each of these companies made false representations—including on their websites and social media accounts—stating or suggesting that certain crypto–related products are FDIC–insured or that stocks held in brokerage accounts are FDIC–insured.” The FDIC alleges that these representations are violations of the FDI Act, 12 U.S.C. § 1828(a)(4), and its implementing regulation, 12 C.F.R Part 328, Subpart B. Part 328 provides, amongst other things that whenever anyone other than an insured depository institution states that a product is FDIC insured, they must identify the insured depository institution where the funds are placed; failure to do so is considered a material omission. A final rule supplementing and reworking Part 328 was approved by the FDIC in May 2022 and has been effective since July 2, 2022.
The FDIC insures deposits held in insured banks and savings associations in the event of their failure; it does not insure assets issued by non-bank 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 to indicate insured status. Specifically, no person may represent or imply that any deposit liability, obligation, certificate, or share is insured or guaranteed by the FDIC or knowingly misrepresent the extent of any insurance. Additionally, there is a prohibition on the use of “Federal Deposit”, “Federal Deposit Insurance, “Federal Deposit Insurance Corporation”, or “FDIC” as part of a business name.
In a letter dated August 18, 2022 that was sent to FTX US, the FDIC states that Brett Harrison, President of FTX US, posted on Twitter that “direct deposits from employers to FTX US are stored in individually FDIC-insured bank accounts in the users’ names” and “stocks are held in FDIC-insured and SIPC-insured brokerage accounts.” The FDIC also alleges 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 immediate removal of any statements or representations stating or implying that FTX US brokerage accounts or products are FDIC-insured. After receiving the letter, Mr. Harrison deleted the tweet and stated in a subsequent tweet that he did not mean to say that crypto assets were insured.
The letters sent to the other companies, also dated August 18, 2022, allege similar misrepresentations with demands to immediately cease and desist. For example, the letter sent to Cryptonews.com alleges that it published reviews of cryptocurrency exchanges, including Coinbase, eToro, and Gemini, implying they are FDIC –insured. The letters sent to CryptoSec.info and SmartAsset.com allege their websites included a link to “FDIC-Insured Crypto Exchanges” and statements that this status “means that the FDIC should protect your funds against losses” and “if you lose your money on deposit the FDIC will reimburse those losses up to the program’s cap.” The last letter was sent to an individual who registered website domains including www.fdiccrypto.com, in contravention of the FDI Act’s prohibition on the use of 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 allegations. That same day, in response to the failure of some crypto companies and misperceptions of some customers that crypto-products they owned were FDIC-insured, the FDIC issued a fact sheet entitled “What the Public Needs to Know About FDIC Deposit Insurance and Crypto Companies.” The fact sheet includes links to consumer resources and clarification as to products and risks covered – and not covered – by deposit insurance.
At this time of volatility in the crypto market, we expect similar actions will be taken by the FDIC against other crypto companies making similar representations to those that were subject to the recent cease and desist letters. In addition to increased enforcement by the FDIC under newly effective Part 328, the CFPB issued a Circular warning that a misrepresentation involving the FDIC name or logo can constitute a deceptive act or practice in violation of the Consumer Financial Protection Act. Crypto companies and their partners should address their advertising, websites, and other public representations to make sure they are not stating or implying that crypto assets are FDIC-insured. Insured banks should also review the risk management and governance considerations set forth by the FDIC in the Advisory.