Two financial regulatory agencies are threatening to crack down on cryptocurrency and other fintech firms that falsely suggest their institutions have deposit insurance.
The Federal Deposit Insurance Corp. adopted a rule Tuesday that outlines its authority to prohibit individuals and organizations from making misrepresentations about deposit insurance, or misusing the FDIC’s name or logo. Following the meeting, the Consumer Financial Protection Bureau issued an enforcement memorandum to the same end.
Although the agencies’ actions apply generally across the financial system, individual policymakers suggested that the crackdown is targeted at fintech and crypto firms.
“It is especially important in light of the growth of nonbank crypto firms and fintechs and their relationships with banks,” acting Comptroller Michael Hsu, who sits on the FDIC’s board, said at a meeting of the board. “The potential for consumer confusion about the status of cash held at these firms is high and this final rule will help provide clarity.”
The regulators’ moves come after the collapse of TerraUSD,
“Many people are continuing to learn with respect to crypto assets that something might not actually be stable, and they may actually have a view that it’s equivalent to a deposit in an FDIC insured account,” CFPB Director Rohit Chopra, who also sits on the FDIC board, said at the meeting. “And it’s not.”
The question affects the many banks, including Silvergate Bank and Custodia Bank, that have been working on issuing or using stablecoins, as well as regulated stablecoin issuers and all crypto investors.
Chopra said that the bureau’ 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.
Rick Schwartz, a lawyer at the FDIC policy unit, explained that the agency has seen a rise in the number of institutions falsely representing FDIC insurance.
He specified that the agency works with fintech firms, for example, to make sure the fintech company explains when appropriate that any FDIC insurance a customer might receive is through the insured depository institution that the company partners with, not through the fintech itself.
“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,” Martin Gruenberg, acting chairman of the FDIC, said in a statement. “In particular, the final rule requires nonbanks to support those claims and identify the bank or banks with which they have existing business relationships and into which consumers’ deposits may be placed.”
The rule will also create a process where institutions and consumers can report false advertising or misrepresentation about deposit insurance.
The FDIC is also considering revising and clarifying the agency’s official sign and advertising rules as it relates to deposit insurance, according to Gruenberg. He said that he expects the board would consider a proposed rule on the issue later this year “to account for the changes in how insured institutions offer products and services to consumers, including through digital channels.”
