WASHINGTON — One of the latest casualties of the crypto market turmoil could portend a larger push by regulators to crack down on how industry players market themselves to consumers.
Amid the carnage in the crypto market, some firms are offering an attractive prize: stability.
Voyager Digital recently drew scrutiny from a regulator for suggesting to its customers that their USD deposits were insured by the Federal Deposit Insurance Corp. — although it’s far from alone.
Just on Wednesday, the president of the crypto exchange FTX.US, Brett Harrison,
“The FDIC logo, that’s gold-plated stuff,” said Paul Clark, senior counsel at Seward & Kissel financial services regulatory group. “It’s intended to make you confident that your money is secure.”
Those representations of FDIC insurance — whether they end up getting the nod of approval from the agency or not — is an area of growing concern to policymakers, experts say. And with a new rule on the books, the FDIC is newly empowered to go after other companies the agency believes are misrepresenting how and to what degree their funds are protected.
“The problem is some of these crypto companies aren’t playing by the rules, and yet they’re trying to claim the same advantages as the companies that are,” said Poppy Alexander, a partner at Constantine Cannon who represents whistleblowers, particularly in finance. “That’s the problem, and that’s going to lead to investors getting hurt.”
Whose deposits are they, anyway?
When Voyager filed for bankruptcy earlier this month, social media users scrambled to understand what would happen to their noncryptocurrency deposits held with the company. Marketing from Voyager suggests that customers’ USD deposits were safe with Voyager “through our strategic relationship with our banking partner, Metropolitan Commercial Bank.”
But deposit insurance held through the Federal Deposit Insurance Corp. only applies to insured banks and savings associations and only protects deposits in the event of the insured institution's failure (
The FDIC has begun an inquiry into Voyager’s marketing, according to a story originally
In a follow-up
Clark said that customers’ access to that cash will ultimately be decided by the particulars of how Voyager has managed those accounts, and how the bankruptcy court looks at them.
“Voyager has to be keeping records of how much each person has in that account,” Clark said. “Are you holding it in a bona fide fiduciary capacity, to use technical legal term, for other people? If you’re commingling it and using it for business, then what you’re saying is, ‘No, I wasn’t holding this for other people, I was borrowing the money from them and using it in my business, and they get to stand in line with everybody else.’ ”
Regulators’ ramped-up focus
News of the FDIC’s inquiry into Voyager broke just days after the agency’s
Combined with the Voyager inquiry, experts say, this is a strong signal that the agencies are zeroing in on this issue, and they anticipate the agency will look further into companies’ claims of customers’ deposits being protected by FDIC insurance.
While there are broader issues at play, not just in connection with cryptocurrency, the financial distress of certain crypto companies is bringing the issues to the forefront right now, said Walter Zalenski, a partner at Buckley who advises financial firms on regulatory matters.
"I don't think we've seen the last word on this by any stretch of the imagination," he said. "You're dealing with many young, fast growing companies, and we can expect to see these issues arise more frequently than they have historically."
Acting FDIC Chairman Martin Gruenberg said in a statement at the time that the FDIC’s final rule requires nonbanks to support their claims of FDIC insurance, and to “identify the bank or banks with which they have existing business relationships.”
“One important aspect of the final rule is the steps it takes to address situations in which nonbank entities make unsubstantiated claims about the availability of deposit insurance,” he said.
Not only could crypto firms have the newly expanded powers of the FDIC to contend with, the Consumer Financial Protection Bureau signaled its interest in the issue as well with an enforcement memorandum. CFPB Director Rohit Chopra said the bureau’s enforcement memorandum clarifies that entities misusing the name or logo of the FDIC are violating the Consumer Financial Protection Act, putting enforcement in the CFPB’s purview, regardless of whether that misuse was done “knowingly” or not.
“The banking industry is one of the most regulated, if not the most regulated industries in the country for a reason,” Alexander of Constantine Cannon said. “It’s really important, and those regulations are really important to protect individuals. So remaining willfully ignorant of your obligations and why those regulations exist — that’s not an excuse, and that’s just going to lead to harm.”
Cliff Stanford, a partner at Alston & Bird who leads the firm’s bank regulatory team, said it remains to be seen whether crypto and other companies heed the FDIC’s warning that the agency is policing the issue.
“Firms are just looking for whatever market differentiator they can find, and there’s so many companies that are trying to get a slice of that pie,” he said. “There’s been a high risk appetite for pushing the envelope on marketing claims, and the FDIC has seen that.”
