The FDIC proposes new rules for insurance representation, taking aim at cryptocurrency

The news: The Federal Deposit Insurance Corporation (FDIC) proposed new rules for how deposit insurance should be represented on digital channels, aiming at clearing up the confusion around cryptocurrency, per American Banker.

Clarity is key: The proposal outlines how the FDIC name and logo should be used in digital settings.

• The agency will create a digital FDIC sign that depository institutions must display on all of their online channels, similar to how signs must be displayed in branch locations.
• The firms must also label products as insured deposits or nondeposits. On nondeposit products, the firms must specify that they are not insured by the FDIC and that they may lose their value.
• The guidelines also specify actions that depository institutions shouldn’t do, such as using the FDIC name or logo in ways that might suggest a nondeposit product is insured.
• When both deposit and nondeposit products are displayed together, the institutions must disclose that the nondeposit product is not insured and may lose value.
• The proposal specifically labels crypto assets as nondeposit, uninsured financial products.

Not coincidental timing: The new digital guidelines were proposed just weeks after the collapse of crypto exchange FTX, signaling regulators’ urgency to take hold of the spiraling crypto sector. But this isn’t the first attempt to regulate FDIC representation.

• In July, the FDIC opened an investigation against crypto lender Digital Voyager for allegedly making misleading claims that investors’ deposits were FDIC-insured. In reality, cash deposits at New York-based partner Metropolitan Commercial Bank were insured only in scenarios in which the bank itself collapsed.
• In August, the FDIC issued cease and desist letters to five crypto organizations—FTX US, Cryptosec.info, SmartAsset.com, Cryptonews.com, and FDICCrypto.com—ordering them to stop making misleading statements about investors’ ability to federally insure their crypto deposits.

Regulator support: The proposed rules met with support from other federal agencies, including the Office of the Comptroller of the Currency (OCC) and the Consumer Financial Protection Bureau (CFPB).

• Acting OCC Comptroller Michael Hsu applauded the guidelines, saying that they will protect consumers and the trust they have in the FDIC name and logo.
• Earlier this year, the FDIC instituted a new rule that stated that the misuse or misrepresentation of the FDIC name, logo, or deposit insurance is a violation of the Consumer Financial Protection Act, and that the rule is enforceable by the CFPB. But at this latest meeting, CFPB director Rohit Chopra expressed concern that consumers may still be harmed if the general consensus belief is that a product is insured, even if no FDIC representation is made.

The bottom line: The FDIC’s digital update to its rules and its attempt to clarify what those rules mean for crypto firms would be strong steps in the direction of crypto regulation. And they’re also valuable to consumers who may not have a full understanding of crypto assets but are interested in learning more, as well as those who’ve already invested. Though investors may still be prey to some misunderstandings about deposit insurance, a distinct and straightforward disclosure should give pause to some before they proceed with a transaction.

This article originally appeared in Insider Intelligence’s Banking Innovation Briefing—a daily recap of top stories reshaping the banking industry. Subscribe to have more hard-hitting takeaways delivered to your inbox daily.

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