On July 29, 2022, the Federal Deposit Insurance Corporation (FDIC) issued a advisory and fact sheet, (collectively, the “FDIC Crypto Guidance”) to address concerns about consumer confusion arising from crypto assets offered by, through, or in connection with insured banks. The FDIC Crypto Guidance follows the FDIC and the Federal Reserve Board of Governors (Federal Reserve) joint letter issued to fintech company Voyager Digital, LLC on July 28, 2022, which demands that Voyager cease and desist, and take immediate corrective action to remove from its website, mobile app, social media accounts and all forms of marketing, advertising and consumer-facing materials any statement suggesting that:
Voyager itself is FDIC insured;
clients who invested with the Voyager cryptocurrency platform would receive FDIC pass-through insurance coverage for all funds provided to, held by, on, or with Voyager, without reference to the FBO account (for the benefit of) maintained at Metropolitan Commercial Bank, an FDIC-insured bank, where client funds were held; and
the FDIC would insure customers against the failure of Voyager itself.
Section 18(a)(4) of the Federal Deposit Insurance Act (FDI Act) prohibits any person from representing or implying that an uninsured deposit is insured or from knowingly misrepresenting the scope and the manner in which a deposit liability, bond, certificate or action is insured under the FDI Act. 1 The FDI Act provides the FDIC with independent authority to investigate and take administrative and enforcement action, including the power to issue cease-and-desist orders and impose civil monetary penalties, against anyone who makes false statements about deposit insurance.
The Final Rule Implementing the FDI Act (FDIC Rule) also created a whistleblower framework by allowing anyone2 to report suspected cases of misleading advertising, misuse, or misrepresentation regarding deposit insurance, and has established procedures by which the FDIC will investigate and, if necessary, formally and informally resolve potential violations. In a commentary on the FDIC rule, the FDIC noted that the rule will primarily affect “non-bank entities and individuals who potentially use the FDIC name or logo or make misrepresentations about deposit insurance.” .3
FDIC Concerns and Risk Management Considerations
In the FDIC Crypto Guidance, the FDIC expresses concerns about the potential for consumer confusion or harm arising from crypto assets offered by, through, or in connection with insured banks. Specifically, the FDIC is concerned that inaccurate representations regarding deposit insurance could confuse non-bank customers and mislead those customers into believing that they are protected against any type of loss. Additionally, the FDIC notes, non-bank customers may not understand the bank’s role with respect to non-bank business, or the speculative nature of some crypto assets versus deposit products.
On May 17, 2022, the Consumer Financial Protection Bureau also highlighted the risk posed by these insured bank/fintech partnerships and issued a circular regarding misleading representations regarding deposit insurance, noting that these may result in violations of the Consumer Financial Protection Act.
In the July 29 notice, the FDIC reminds insured banks to be aware of how FDIC insurance works and to assess, manage, and monitor risks arising from all third-party relationships, including those with crypto companies. In their relationships with non-bank partners, including crypto companies, insured banks may wish to put controls in place to ensure that:
non-bank partners do not misrepresent the availability of deposit insurance for their financial products and take appropriate steps to remedy any misrepresentation;
deposit insurance-related communications are clear and visible (noting that non-bank entities, such as crypto companies, that advertise or offer FDIC-insured products in dealings with insured banks may reduce confusion consumers by clearly and prominently: (i) indicating that they are not an insured bank; (ii) identifying the insured bank(s) where customer funds may be deposited; and (iii) communicating that crypto assets are not FDIC-insured products and may lose value);
non-bank partner marketing materials and related information are regularly reviewed for accuracy and clarity;
appropriate risk management policies and processes are in place to ensure that any services provided by or deposits received from any third party, including a crypto company, are and remain compliant with all laws and regulations; and
third-party risk management policies and procedures effectively manage risks related to crypto assets, including compliance risks.
Federal Reserve watch letter
Following the release of the FDIC Crypto Guidance, the Federal Reserve issued a watch letter on August 16, 2022 acknowledging the potential opportunities for banks, their customers, and the global financial system emerging from the crypto-asset sector and the heightened and new risks posed by crypto-assets (Watch letter). The watch letter highlights the risks of the crypto-asset sector regarding security and soundness, consumer protection and financial stability and:
outlines the steps banks supervised by the Federal Reserve should take before engaging in crypto-asset-related activities4;
requires Federal Reserve-supervised banks to notify their primary Federal Reserve supervisory contact before engaging in crypto-asset-related activities or, if they are already engaged in such activities, to promptly notify their contact Federal Reserve Supervisory Board;5
requires banking organizations supervised by the Federal Reserve to implement adequate systems, risk management, and controls before engaging in these activities to ensure consistency with safe and sound banking and compliance with laws applicable, including applicable consumer protection laws and regulations; and
encourages banks in member states to inform their state regulator before engaging in any activity related to crypto-assets.
Trends Leading to Increased Regulatory Oversight
FDIC Crypto Guidance and Supervisory Letter Highlights Financial Institution Regulators’ Growing Interest in the Crypto-Asset Space and Positions Timely Amid Increased FinTech-CryptoBank Partnerships , which led to an increase in website marketing materials using the FDIC. logo and describing the FDIC deposit insurance.6 This is especially true in the context of USD-backed stablecoins, whose deposits can be held with insured banks.seven These developments, along with current crypto market conditions, create the optimal framework for increased regulatory oversight and enforcement for banks and non-bank/fintech and crypto businesses, as consumers can increasingly rely on FDIC assurance representations when assessing financial risks. products and services, especially those involving crypto assets.
Given the increase in activity and regulatory scrutiny in this area, banking institutions and non-banking entities, including those in the fintech and crypto-asset space, may wish to review their relationships, contracts, disclosures and respective marketing materials with counsel to ensure compliance with new guidance and regulatory expectations.
1 12 USC §1828(a)(4)(A).
2 The FDIC rule defines a person as an individual, sole proprietor, partnership, corporation, unincorporated association, trust, joint venture, pool, syndicate, agency, or other entity, association, or organization , including a “regulated institution”. False advertising, misrepresentation of insured status, and misuse of the FDIC name or logo87 FR 33415-01, 33415, 33421.
3 Identifier. at 33418.
4 The watch letter defines crypto-asset-related activities as activities that “may include, but are not limited to, custody of crypto-assets and traditional custodial services; ancillary custodial services; facilitation of purchases and customer sales of crypto-assets; loans secured by crypto-assets; and issuance and distribution of stablecoins.
5 The Federal Reserve notification requirement follows Letter from financial institution issued by the FDIC on April 7, 2022, Notifying FDIC-supervised institutions that intend to engage or are currently engaging in activities involving or related to cryptographic assets to notify the FDIC of such activities so that the FDIC can assess their safety and soundness, consumer protection and implications for financial stability.
6 See Request for Information on FDIC Signage and Advertising Requirements and Potential Technology Solutions, 85 FR 10997-01, 10998 (identifying two types of board categories of potentially confusing situations for consumers; insured business relationships between banks and fintech and misrepresentation by non-FDIC insured entities, and the need to address “evolving channels and banking”).
seven See Consumer Financial Protection Bureau, Statement from CFPB Director Rohit Chopra, FDIC Board Member, on the Final Rule Regarding False Advertising, Misrepresentation of Insured Status, and Misuse of the FDIC Name or Logo (May 17, 2022).
©2022 Greenberg Traurig, LLP. All rights reserved. National Law Review, Volume XII, Number 231