FDIC Accuses Five Crypto Companies Of Misleading Customers About Deposit Insurance

August 24, 2022
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Five crypto companies with operations in the US, including major exchange FTX, have been accused of misrepresenting the insurance status of customer deposits.

Five crypto companies with operations in the US, including major exchange FTX, have been accused of misrepresenting the insurance status of customer deposits.

The US Federal Deposit Insurance Corporation (FDIC) has issued cease and desist letters to five crypto businesses with operations in the US, accusing them of false advertising of crypto-asset products.

The five companies include Cryptonews.com, CryptoSec, SmartAsset.com, FDICcrypto.com and FTX US, a subsidiary of the world’s second largest exchange by volume, FTX.

The FDIC has demanded that the five companies cease and desist from making false and misleading statements about FDIC deposit insurance and take immediate corrective action to address these statements.

Based on the FDIC’s findings, each of the five companies made false representations on their websites and social media accounts, stating or suggesting that certain of their crypto–related products are FDIC-insured, or that stocks held in brokerage accounts are FDIC-insured.

In the case of FDICcrypto.com, the company registered a domain name that falsely suggests affiliation with or endorsement by the FDIC, the agency claimed.

As noted in an FDIC statement, the Federal Deposit Insurance Act (FDI Act) prohibits any person from representing or implying that an uninsured product is FDIC-insured, or from knowingly misrepresenting the extent and manner of deposit insurance.

The FDI Act also prohibits companies from implying that their products are FDIC-insured by using “FDIC” in the company’s name, advertisements or other documents.

Under the FDI Act, the FDIC is authorised to enforce these prohibitions.

When held legitimately, FDIC deposit insurance protects customer deposits in the event of a run on an FDIC-insured bank.

To determine if an institution is FDIC-insured, the agency has urged customers to ask a representative of the institution, look for the FDIC sign at the institution or use the FDIC’s BankFind tool.

Specific claims: FTX US

Being by far the largest of the five businesses, the FDIC’s claims against FTX US are the most significant and overlap with those against several other crypto businesses that have advertised for FTX US.

In its cease and desist letter, the FDIC refers to a tweet posted by Brett Harrison, president of FTX US, which stated that direct deposits to FTX US are “stored in individually FDIC-insured bank accounts in the users’ names”.

Harrison also wrote that stocks purchased via FTX US are “held in FDIC-insured brokerage accounts”.

Moreover, FTX is identified as an “FDIC-insured” cryptocurrency exchange on the SmartAsset.com and CryptoSec.info websites.

“These false and misleading statements represent or imply that FTX US is FDIC-insured, and that funds deposited with FTX US are placed, and at all times remain, in accounts at unnamed FDIC-insured banks,” said the FDIC.

The statements also suggest that brokerage accounts at FTX US are FDIC-insured, and that FDIC insurance is available for cryptocurrency or stocks.

“In fact, FTX US is not FDIC-insured, the FDIC does not insure any brokerage accounts, and FDIC insurance does not cover stocks or cryptocurrency,” the agency said.

The FDIC has given FTX US 15 days to fully comply with the cease and desist order, and to respond to the agency detailing the actions it has taken.

This should include a description of all efforts to identify, locate and remove misrepresentations of FDIC insurance.

Alternatively, if FTX US believes that the statements it has made about FDIC insurance are true, it must provide a full listing of all such statements with information supporting their accuracy in no more than 15 days. Failure to respond will result in further enforcement action.

More false advertising claims

As in the FTX US case above, the claims against CryptoNews.com also involve major crypto businesses that have featured on its website, including Coinbase, Gemini, eToro and Crypto.com.

In a review published at CryptoNews.com, Coinbase is described as “one of a few exchanges which is actually regulated and insured by the FDIC”.

The same review claims that “Coinbase is [an] FDIC insured exchange, meaning that all the funds that are kept online (remaining 2%) are protected against theft”.

In eToro’s case, a reviewer writes that “eToro’s US users will be glad to know that their cash funds up to USD 250,000 are FDIC-insured, meaning you are guaranteed to get your funds back in the event of eToro’s failure”.

The same claim is made with regard to Crypto.com in another review, alongside a claim that “Crypto.com lets you retain ownership of your fiat funds, meaning they can never be claimed by Crypto.com or its creditors”.

The FDIC said these are only an example of the most prominent allegedly false statements, and should by no means be seen as an exhaustive list.

As with FTX US, CryptoNews.com has been given 15 days to either remove the allegedly false or misleading material or to write back to the FDIC detailing the accuracy of the statements in question.

The FDIC’s actions open up a new arena of battle between the agency and the crypto industry, following allegations by Senator Pat Toomey (R-PA) that the FDIC has been using extra-legal means to pressure banks into rejecting legitimate business from crypto companies.

As reported by VIXIO, Toomey’s claims are based on testimony from multiple whistleblowers representing the “affected parties”, who claim that the FDIC is using its influence to prevent further commercial and credit relationships between banks and crypto firms.

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