Over the years, several cryptocurrency companies have claimed that deposits with them were insured by the United States Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) as if they were regular savings accounts. While so far, no crypto firm has been able to offer depositors this type of insurance, some speculate it could be the key to mass adoption.
The most notable case is that of bankrupt lender Voyager Digital, which saw regulators instruct it to remove “false and misleading statements” regarding FDIC insurance. Crypto exchange FTX has been a beacon of hope looking to backstop contagion in the cryptocurrency industry, but it received a cease-and-desist letter from the FDIC to stop suggesting user funds on the platform were insured.
As it stands, even major players in the cryptocurrency space aren’t FDIC-insured. Coinbase, for example, details on its pages that it carries insurance against losses from theft but is not an FDIC-insured bank and that cryptocurrency is “not insured or guaranteed by or subject to the protections” of the FDIC or Securities Investor Protection Corporation (SIPC).
The exchange, however, points out that “to the extent U.S. customer funds are held as cash, they are maintained in pooled custodial accounts at one or more banks insured by the FDIC.” Speaking to Cointelegraph on the subject, a Coinbase spokesperson only said she can confirm “that Coinbase is aligned with the latest FDIC guidance.”
So what is FDIC insurance, why is it so sought-after in the cryptocurrency industry and why does it remain so elusive?
What is FDIC insurance?
The FDIC itself was created amid the Great Depression in 1933 to boost the financial system’s stability following a wave of bank failures during the 1920s and has managed to protect depositors ever since.
FDIC insurance refers to the insurance provided by this agency that safeguards customer deposits in the event of bank failures. Cal Evans, managing associate at blockchain legal services firm Gresham International, told Cointelegraph:
“FDIC insurance is basically a layer of protection that covers one individual for up to $250,000 and its a backing that’s given by the United States government. It says ‘look, if this company goes bankrupt, we will guarantee your account to the value of $250,000 per person, per company.’”
So, if an FDIC-insured financial institution fails to meet its obligations to customers, the FDIC pays these amounts to depositors up to the assured amount while assuming the bank and selling its assets to pay off owed debt. It is worth noting that FDIC insurance does not cover investments like mutual funds.
Other countries have similar schemes, with deposits in the European Union being guaranteed up to $98,000 (100,000 euros) to protect against bank failures, for example. These schemes improve confidence in the financial system.
Speaking to Cointelegraph, Noah Buxton, a partner and practice leader for blockchain and digital assets at consulting firm Armanino, said, “No customer’s crypto holdings are FDIC-insured today,” but added that crypto platforms often hold customers’ dollar balances in financial institutions that are FDIC-insured.
There is a distinct difference between users having their funds insured, and the impact of a cryptocurrency firm having FDIC insurance — even for only United States dollar deposits — is hard to estimate.
The potential impact on crypto
If the FDIC were to insure deposits at a cryptocurrency platform, it would likely gain an advantage over other U.S.-based cryptocurrency platforms, as the perceived security of that platform would gain a huge boost, especially as it would be seen as a green flag from regulators as well.
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Evans said that the FDIC would give the retail market “a lot more confidence because if FDIC insurance does happen and does apply to these companies, that means it’s going to massively, massively encourage people who are in the United States to put their money in crypto because it’s as secure as putting dollars at a bank,” adding:
“It’s going to massively help adoption, because it’s going to encourage the retail market to see companies like this at a parallel, in term of safety, with banks that people know.”
Mila Wild, marketing manager at cryptocurrency exchange ChangeHero, told Cointelegraph that one of the biggest problems the cryptocurrency sector faces is a lack of regulation and supervision, especially after the collapse of the Terra ecosystem “undermined the confidence of many investors.”
Per Wild, the FDIC doesn’t just insure customer deposits, as it also “conducts constant monitoring of financial institutions for security and compliance with consumer protection requirements.”
Dion Guillaume, global head of PR and communication at crypto exchange Gate.io, told Cointelegraph that a “friendly crypto regulatory environment would…
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