1.13 - Federal Deposit Insurance Corporation (FDIC)
The FDIC insures the deposit accounts of retail banks and savings and loan associations up to $250,000. If a bank fails and has insufficient assets to pay its depositors at least $250,00 each, the FDIC steps in and pays them. The FDIC thus provides a key backstop in the retail banking system to reduce the risk of depositor panic in economic downturn that could result in a bank run. (The National Credit Union Association plays the same role for the nation’s credit unions.)
As an insurer of retail deposit banks, the FDIC wants to understand what could cause a bank to fail. Since mid-2021, the FDIC has started to examine the role that crypto-related assets may play in a bank’s risk profile. Most of its work so far, however, is in requesting and gathering information. It has not specifically required one action or another from banks.
Starting in May 2021, the FDIC sent a formal information request to banks and the general public asking for information about the digital asset work that banks are doing. Specifically, it asked, among other questions:
- what digital asset services are insured institutions providing?
- what digital asset services are most in demand from insured institutions?
- what kind of risks, and risk management policies, apply to digital assets?
- how are operations being integrated with traditional banking systems?
- what kind of guidance is needed from the FDIC?
- what distinctions apply to fiat-backed stablecoins and stored value products?
- what challenges arise from the FDIC taking over digital assets as a receiver?
FDIC, RIN 3064-ZA25, Request for Information and Comment on Digital Assets (2021.05.17). Other than revealing what questions it was considering, this RFI provided no guidance to insured institutions.
In April 2022, the FDIC took more aggressive action. It required all insured institutions to notify the FDIC regarding what crypto-related activities the institutions are engaging in, or intend to engage in. FDIC, Financial Institution Letter, Notification of Engaging in Crypto-Related Activities (2022.04.07). The letter begins by noting that “[c]rypto-related activities may pose significant safety and soundness risks, as well as financial stability and consumer protection concerns.” Id.
The letter then identified key risks in the areas of (1) safety and soundness; (2) financial stability; and (3) consumer protection. Among others, those risks include:
- ownership identification, “including whether it is possible for ownership to be clearly validated and confirmed”;
- risks of anti-money laundering / countering the financing of terrorism;
- IT security;
- credit risk exposure;
- market valuation/pricing;
- liquidity risk, particularly due to volatility;
- run risk on fiat assets backing crypto-assets
- consumer confusion regarding crypto-assets compared to traditional banking products
- application of consumer protection laws to crypto-assets
To permit the FDIC to evaluate these and other risks, insured financial institutions are required to submit current and proposed crypto-asset use to the FDIC. After receiving that information, the FDIC will then “request that the institution provide information necessary to allow the agency to assess the safety and soundness, consumer protection, and financial stability implications of such activities,” which requests “will vary on a case-specific basis depending on the type of crypto-related activity.” After its review, the FDIC will then provide “relevant supervisory feedback.”
Finally, the FDIC reminds institutions that it has authority pursuant to Federal Deposit Insurance Act to set safety and soundness standards for insured institutions, pursuant to 12 C.F.R. § 364, and that regulated entities must “be able to demonstrate their ability to conduct crypto-related activities in a safe and sound manner” using those standards.
In releasing the FDIC’s five 2022 priorities, the FDIC noted that evaluating crypto-asset risks would be among them, and that bank regulators should be ready to provide “robust guidance” to banks to adequately address the “significant safety and soundness and financial system risks.” FDIC, Acting Chairman Martin J. Gruenberg Announces FDIC Priorities for 2022 (2022.02.07).
Voyager Digital, LLC, is a platform that leverages a relationship with a traditional bank, Metropolitan Commercial Bank, to permit customers to deposit fiat currency and convert it to cryptocurrency more quickly. Despite leaning on a bank to provide its services, it famously hailed itself as safe (or safer) than a bank. (It is now undergoing a voluntary Chapter 11 bankruptcy to restructure its finances.)
On July 28, 2022 the FDIC and the Fed sent a letter to Voyager demanding that it stop "representing or implying that an uninsured deposit is insured." The FDIC claimed Voyager had leaned too heavily on its relationship with MCB, and MCB's FDIC insured-status, in the following ways:
Voyager has made various representations online, including its website, mobile app, and social media accounts, stating or suggesting that: (1) Voyager itself is FDIC-insured; (2) customers who invested with the Voyager cryptocurrency platform would receive FDIC insurance coverage for all funds provided to, held by, on, or with Voyager; and (3) the FDIC would insure customers against the failure of Voyager itself.
FDIC, Joint Letter Regarding Potential Violations of Section 18(a)(4) of the Federal Deposit Insurance Act (2022.07.28). The regulators demanded that Voyager immediately cease and desist making such representations within two business days.
Shortly thereafter, the FDIC issued an advisory letter to all FDIC insured institutions warning them that they must be careful in dealing with crypto companies because of "the risks of consumer confusion or harm arising from crypto assets offered by, through, or in connection with insured depository institutions." FDIC, Advisory to FDIC-Insured Institutions Regarding Deposit Insurance and Dealings with Crypto Companies (2022.07.29). The FDIC called on insured institutions to "monitor that [crypto] companies do not misrepresent the availability of deposit insurance in order to measure and control risks to the bank." Id.
The FDIC also provided this guidance to crypto companies themselves:
[C]rypto companies . . . that advertise or offer FDIC-insured products in relationships with insured banks could reduce consumer confusion by clearly, conspicuously: (a) stating that they are not an insured bank; (b) identifying the insured bank(s) where any customer funds may be held on deposit; and (c) communicating that crypto assets are not FDIC-insured products and may lose value.
The FDIC further asserts that it has regulatory authority even over non-bank financial institutions — i.e., crypto companies — that are not FDIC insured pursuant to 12 C.F.R. § 328.100 et seq. which governs "false advertising, misrepresentation of insured status, and misuse of the FDIC's name or logo." Id. That regulation became effective on July 5, 2022, and was directly targeted at expanding the FDIC's enforcement authority against "non-bank entities." See FDIC, Final Rule, False Advertising, Misrepresentation of Insured Status, and Misuse of the FDIC's Name or Logo, 87 Fed. Reg. 33415 (2022.06.02).
Given the only 24-day lag time between the rule becoming final and the FDIC utilizing it against a crypto company, it appears the FDIC will be making good on its 2022 priorities to evaluate crypto-asset risks.
On August 19, 2022, the FDIC issued five additional cease and desist letters along the same lines, including to FTX. FDIC, Press Release, FDIC Issues Cease and Desist Letters to Five Companies For Making Crypto-Related False or Misleading Representations about Deposit Insurance (2022.08.19).
In November 2021, the OCC coordinated with the President’s Working Group on Financial Markets and the Federal Deposit Insurance Corporation (FDIC) to release a report on the uses, risks, and opportunities for stablecoins. See President’s Working Group on Financial Markets, the FDIC, and the OCC, Report on Stablecoins (2021.11). The report outlines the various current use cases for stablecoins, documents their explosive growth over recent years, details the perceived risks (to users, to the payments system, and to the greater financial system), and issues a call to action to Congress to enact a “consistent and comprehensive regulatory framework” for stablecoins.
The key aspects of that regulatory framework, as requested by the report, are:
- limiting stablecoin issuers (and those offering redemption and maintenance of reserve assets) to entities that are insured depository institutions, and making them subject to supervision at the depository and holding company levels;
- requiring custodial wallet providers for stablecoins to be subject to federal oversight, including restrictions on lending, compliance obligations for risk management, liquidity, and capital requirements;
- limits on custodial wallet providers’ affiliation with commercial entities or on use of users’ transaction data; and
- ensuring the federal supervisor of a stablecoin issuer has examination and enforcement authority to require issuers to meet risk-management standards, and also has the authority to implement standards to promote interoperability among stablecoins.
Id. at 16–17. Regarding stablecoins, the report notes that depending on how the stablecoin and its reserves are structured, individual holders of the stablecoin may or may not have FDIC insurance. Id. at 4 & n.6. In order for individual stablecoin holders to qualify for the $250,000 in FDIC coverage, the “stablecoin issuer [must] deposit fiat currency reserves at an FDIC-insured bank and do so in a manner that meets all the requirements for ‘pass-through’ deposit insurance coverage” pursuant to 12 C.F.R. § 330.5.
The report also notes that other federal regulatory agencies may have a role to play in oversight of stablecoins, including the Consumer Financial Protection Bureau, the Securities Exchange Commission, the Commodities Futures Trading Commission, Office of Foreign Assets Control, and the Financial Crimes Enforcement Network. Id. at 15, 18, 20. The reference to FinCEN is of particular note, because FinCEN’s regulations require registering with it as a money services business (MSB), establishing an anti-money laundering program, reporting cash transactions of $10,000 or more, and filing suspicious activity reports (SARs). Id. at 20. Doing so may cause downstream compliance issues because, as the report notes, “[c]urrent [Bank Secrecy Act] regulations require the transfer of certain specific information well beyond what can be inferred from the blockchain resulting in non-compliance.” Id.
In November 2021, the FDIC indicated that in 2022 it, in conjunction with the Office of the Comptroller of the Currency and the Federal Reserve (the “Fed”), plans to “provide greater clarity on whether certain activities related to crypto-assets conducted by banking organizations are legally permissible, and expectations for safety and soundness, consumer protection, and compliance with existing laws and regulations.” The Fed, FDIC, & OCC, Joint Statement on Crypto-Asset Policy Sprint Initiative and Next Steps (2021.11.23).
That clarified guidance will include statements on the following categories:
- Crypto-asset safekeeping and traditional custody services.
- Ancillary custody services.
- Facilitation of customer purchases and sales of crypto-assets.
- Loans collateralized by crypto-assets.
- Issuance and distribution of stablecoins.
- Activities involving the holding of crypto-assets on balance sheet.
So far in 2022 neither the Fed, the FDIC, nor the OCC have issued further guidance. The former Chairman of the FDIC, Jelena Williams, made a few additional remarks in early 2022, however. Jelena McWilliams, Remarks at Bipartisan Policy Center (2022.02.03).
In those remarks, she noted that “banks’ engagement in [crypto markets] remains limited, despite substantial demand.” For the FDIC’s part, McWilliams stated that it is considering the question of whether “a stablecoin, or the funds represented by a stablecoin, meets the definition of ‘deposit’ . . . and . . . whether stablecoins could be eligible for deposit insurance.” She then shared her personal view that “bank-issued stablecoins closely resemble digital representations of deposits” (emphasis added) and encouraged the FDIC to continue building on its work and to provide clarity to the public, possibly by amending the deposit insurance rules. McWilliams further encouraged a flexible approach that should vary from a bank with $1 billion in assets to a global systemically important bank. Id.
Those remarks build somewhat on McWilliams’ remarks from just over two months prior, shortly before the release of the joint statement with the Fed and OCC. Jelena McWilliams, Remarks at Money 20/20 (2021.10.27). During those earlier remarks, McWilliams noted that her goal was to provide “clear guidance to the public on how our existing rules and policies apply to crypto assets, what types of activities are permissible for banks to engage in, and what supervisory expectations we have for banks that do engage in such activities.” To achieve that goal in the near term, the FDIC would “issue a series of policy statements in the coming months.”
McWilliams also noted the substantial innovation occurring in crypto-assets, including “a faster, cheaper, more efficient mechanism for making payments than legacy systems,” but cautioned that should stablecoins become dominant, it “could lead to substantial sums of money migrating out of insured banks with significant ramifications for credit creation, financial stability, and bank funding.” Id. To mitigate the risks of stablecoins from “outside the banking sector,” McWilliams stated that the FDIC’s “oversight should rest on the foundation that stablecoins . . . are truly backed 1:1 by safe, highly liquid assets.” Id.
Sources are listed in reverse chronological order.
- See FDIC, Final Rule, False Advertising, Misrepresentation of Insured Status, and Misuse of the FDIC's Name or Logo, 87 Fed. Reg. 33415 (2022.06.02)
- FDIC, Financial Institution Letter, Notification of Engaging in Crypto-Related Activities (2022.04.07)
- The Fed, FDIC, & OCC, Joint Statement on Crypto-Asset Policy Sprint Initiative and Next Steps (2021.11.23)
- President’s Working Group on Financial Markets, the FDIC, and the OCC, Report on Stablecoins (2021.11)