An FDIC Insurance Caper
The explosion of partnerships between banks and financial technology companies has thrown a spotlight on deposit insurance coverage, a long-standing regulatory safeguard.
At the start of this month, the Federal Deposit Insurance Corp. wrote a seemingly innocuous reminder in its monthly consumer newsletter.
“It is important to be aware that non-bank companies are never FDIC insured,” the FDIC wrote. “FDIC insurance … does not protect you against losses due to the non-bank company’s bankruptcy or failure to meet its obligations to its customers. A non-bank’s company failure or bankruptcy may result in delays in accessing your money, even when your money was deposited in a bank for your benefit.”
There’s a back story here.
In July, the crypto brokerage Voyager Digital ran into trouble and decided to suspend all customer trading, deposits and withdrawals. The firm had partnered with New York-based Metropolitan Commercial Bank to provide a deposit account for the benefit of its customers.
According to the FDIC and the Federal Reserve, Voyager and its executives falsely suggested the company was FDIC insured, that customers invested in the platform had coverage for all their funds and that the FDIC would insure Voyager customers in the event Voyager failed.
These representations were “false and misleading statements,” according to a July cease and desist letter that the FDIC and Federal Reserve, which regulates Metropolitan, sent to Voyager. In reality, FDIC deposit insurance would only protect Voyager customers in the event Metropolitan failed — not if Voyager failed, according to a statement from Metropolitan.
On Aug. 11, Voyager resumed cash withdrawals as part of its voluntary reorganization under bankruptcy protections. Voyager’s July 11 statement regarding customers’ dollar deposits acknowledges that the company updated “outdated” blog posts from 2019 after working with the FDIC in 2021 and 2022. The statement adds: “FDIC insurance does not protect against the failure of Voyager and to be clear: Voyager does not hold customer cash.”
The incident highlighted a misunderstanding in how FDIC deposit insurance works when a fintech is involved, and when the coverage kicks in. For its part, the FDIC is continuing to educate the public on how deposit insurance coverage works when a nonbank is involved. In May, the FDIC also approved a rule that authorized it to sanction “any person or organization” that made misrepresentations about deposit insurance.
But in a financial services space increasingly populated by fintechs trying to disrupt how consumers and businesses transact, problems around FDIC insurance marketing and other bank-fintech issues will likely proliferate.
• Kiah Lau Haslett, managing editor of Bank Director