For this deposit insurance. . . | Financial Times

About a month ago, FTX President Brett Harrison decided to send out a tweet.

There were many problems with this idea, but the most significant of them was that he discussed US Federal Deposit Insurance in a way that – regardless of intent – ​​contributed to the sleight of hand, giving investors a false impression of safety.

What is this now?

See what’s going on here? It does not say that the cryptocurrency was insured by the Federal Deposit Insurance Corporation or that the shares were, but that 1) the direct deposits to FTX were held in bank accounts that were insured by the FDIC, and 2) the shares were held in brokerage accounts that were insured by the Securities Investor Protection Corporation. He also claims these accounts are FDIC insured, which is nothing.

In other words, if one of FTX banks fail, you won’t lose your money because those banks were (and probably are) insured by the FDIC. If FTX itself goes bankrupt, but your securities brokerage account does not, you will likely receive “limited protection” from SIPC, and if some rogue employee decides to fraudulently trade in your personal account without authorization, you should be safe.

Not surprisingly, the FDIC took issue with Harrison’s tweets.

In a cease-and-desist letter published Friday, the regulator said:

These statements appear to contain false and misleading statements that the uninsured products are FDIC insured, false and misleading statements about the extent and manner of protection provided by FDIC deposit insurance, and misrepresent the name of the FDIC. These false and misleading statements represent or imply that FTX US is insured by the FDIC, that funds deposited with FTX US are placed and remain at all times in accounts at unnamed FDIC-insured banks, that brokerage accounts at FTX US are insured by FDIC and that FDIC insurance is available for cryptocurrency or stocks. In fact, FTX US is not FDIC insured, the FDIC does not insure brokerage accounts, and FDIC insurance does not cover stocks or cryptocurrency. The FDIC insures only deposits held in insured banks and savings associations (insured institutions), and FDIC insurance only protects against losses caused by bankruptcies of insured institutions. Accordingly, these claims are likely to mislead and potentially harm consumers. . .

Furthermore, the statement regarding direct deposit of funds into “individual FDIC-insured bank accounts” fails to identify the bank(s) with which FTX has a direct or indirect depository relationship and into which such users’ funds may be deposited.

In response, Harrison posted a clarification on Friday:

Well, he says he didn’t mean to fool anyone! But at least one Redditor seemed surprised by the news, posting the line: “Just found out our cryptocurrency is not FDIC insured, only fiat and stocks are.”

Oops! (And stocks aren’t actually FDIC insured! They’re SIPC insured.)

Now the regulators may be a bit touchy right now. The year-to-date collapse in cryptocurrency prices has revealed that FDIC confusion with insurance is surprisingly common among cryptocurrency holders, especially on platforms that have collapsed.

Our colleague Joshua Oliver reported in July that Voyager Digital had made far more aggressive promises, at least before it filed for bankruptcy: “Voyager has said in the past that the FDIC would recover “US dollar funds” in the event that “the company . . . failure,” he wrote. Both the FDIC and the Federal Reserve stepped in and sent a letter on July 28 asking the Canadian crypto-lending platform to stop saying its deposits are insured. (Voyager filed for Chapter 11 bankruptcy on July 6.)

By comparison, Harrison did not exactly promise FDIC insurance in case of FTX failure. But some users were still confused at the time.

Senior Effective Altruist and FTX CEO Sam Bankman-Fried also addressed the FDIC’s letter in a Friday tweet:

In other words: They are very sorry if you did not understand this when Harrison repeatedly published tweets mentioning FDIC insurance, the firm actually did not they have FDIC insurance itself. FTX just works with banks that do.

And now that they’re “supporting” direct deposit – presumably directly and not through FDIC-insured banks – they’re “excited to work with the FDIC on this” 🙂

Leave a Comment