How FDIC Insurance Can Bring Bitcoin to the Masses
Over the years, several cryptocurrency companies have claimed that deposits with them were insured by the US Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) as if they were regular savings accounts. Although so far no crypto firm has been able to offer depositors this type of insurance, some speculate that it could be the key to mass adoption.
The most notable case is bankrupt lender Voyager Digital, which saw regulators instruct it to remove “false and misleading statements” regarding FDIC insurance. Crypto exchange FTX has been a beacon of hope to stop contagion in the cryptocurrency industry, but it received a cease-and-desist letter from the FDIC to stop suggesting that user funds on the platform were insured.
As it stands, even major players in the cryptocurrency space are not FDIC insured. Coinbase, for example, details on its pages that it has insurance against losses from theft, but that it is not an FDIC-insured bank and that cryptocurrency is “not insured or guaranteed by or subject to the protection” of the FDIC or the Securities Investor Protection Corporation ( SIPC).
However, the exchange points out that “to the extent that US customer funds are held as cash, they are held in pooled custody accounts at one or more banks insured by the FDIC.” Speaking to Cointelegraph on the subject, a Coinbase spokesperson said only that she can confirm “that Coinbase is in compliance with the latest FDIC guidance.”
So what is FDIC insurance, why is it so sought after in the cryptocurrency industry and why does it remain so elusive?
What is FDIC Insurance?
The FDIC itself was created in the middle of the Great Depression in 1933 to increase stability in the financial system after a wave of bank failures in the 1920s and has managed to protect depositors ever since.
FDIC insurance refers to the insurance provided by this agency that insures customer deposits in the event of bank failure. Cal Evans, managing assistant at blockchain legal services firm Gresham International, told Cointelegraph:
“FDIC insurance is basically a layer of protection that covers a person for up to $250,000 and it’s a back-up that’s provided by the United States government. It says ‘look, if this company goes bankrupt, we’ll guarantee your account to a value of $250,000 per person, per company.”
So if an FDIC-insured financial institution defaults on its obligations to customers, the FDIC pays those amounts to depositors up to the insured amount while taking over the bank and selling its assets to pay off debt. It’s worth noting that FDIC insurance does not cover investments such as mutual funds.
Other countries have similar schemes, where deposits in the EU are guaranteed up to $98,000 (100,000 euros) to protect against bank failure, for example. These arrangements increase confidence in the financial system.
Speaking to Cointelegraph, Noah Buxton, a partner and head of blockchain and digital assets practice at consulting firm Armanino, said, “No customer’s crypto holdings are FDIC insured today,” but added that crypto platforms often hold customers’ dollar balances in financial institutions. which is FDIC insured.
There is a clear difference between users who have their money insured, and the impact of a cryptocurrency firm that has FDIC insurance – even for just US dollar deposits – is difficult to estimate.
The potential impact on crypto
If the FDIC were to insure deposits on a cryptocurrency platform, it would likely gain an advantage over other US-based cryptocurrency platforms, as the perceived safety of that platform would receive a huge boost, especially as it would be seen as a green flag from regulators as well.
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Evans said the FDIC would give the retail market “a lot more confidence because if FDIC insurance happens and applies to these companies, that means it’s going to massively, massively encourage people who are in the United States to put their money in crypto. because it’s as safe as putting dollars in a bank,” adding:
“It’s going to help massively with adoption, because it’s going to encourage the retail market to see companies like this on a par, in terms of security, with banks that people know.”
Mila Wild, head of marketing at cryptocurrency exchange ChangeHero, told Cointelegraph that one of the biggest problems facing the cryptocurrency sector is a lack of regulation and oversight, especially after the collapse of the Terra ecosystem “undermined the confidence of many investors.”
Per Wild, the FDIC doesn’t just insure customer deposits, as it also “conducts constant monitoring of financial institutions for safety and compliance with consumer protection requirements.”
Dion Guillaume, global head of PR and communications at crypto exchange Gate.io, told Cointelegraph that a “friendly crypto-regulatory environment would be crucial for adoption,” as “blind regulatory sanctions” do not help. Guillaume added that digital asset insurance can be very different and several factors must be carefully considered.
How hard is it to get FDIC insured?
Since the FDIC can significantly increase confidence in the industry and several major exchanges have shown interest in getting it, it is important to look at how difficult it is for a cryptocurrency native firm to actually become FDIC insured.
Evans told Cointelegraph that it is “actually relatively easy to get” as long as specific criteria are met by the organization that wants to get it. The organization must make the necessary applications and prove the necessary liquidity and may potentially need to detail its management structure.
For Evans, FDIC insurance would “massively give companies operating in the United States a huge, huge advantage over foreign firms,” as US residents opening accounts with insured firms would have a huge incentive not to use decentralized exchanges or other peers -to- peer platforms.
Wild took a more negative stance, saying that it is “not possible to obtain FDIC insurance” as it only covers “deposits held in insured banks and savings associations and protects against losses caused by the bankruptcy of these insured depository institutions.” Wild added:
“While we imagine that crypto projects will be able to have FDIC insurance one day, that means sacrificing decentralization as one of the core crypto values.”
She further claimed that the FDIC’s statements on trading crypto firms “attempt to vilify crypto companies and emphasize their perceived negative impact on society.” Wild concluded that the FDIC telling crypto projects not to imply they are insured “could further reduce confidence in cryptocurrencies.
For Wild, cryptocurrencies will remain a riskier asset for now, as users will not have any form of public protection. As a result, crypto users should “be vigilant about their assets.” This does not mean that fiat savings are safer, she said, as rising inflation eats them away.
Noah Buxton, a partner at consulting firm Armanino, went into more detail on the process, telling Cointelegraph that platforms that obtain FDIC insurance would “require a modified insurance regime, the creation of which has many significant hurdles.”
He said the FDIC needs to figure out how to take possession of crypto assets, how to value them and how to distribute them to the customers of failed crypto platforms, adding:
“While this is possible and could happen, it is more likely that private insurance and reinsurance vehicles will fill the void for the foreseeable future. This is a necessary component of any market, and the wider coverage availability and competitive set of insurance options will benefit crypto holders.”
Is the insurance worth hunting for?
If in the future users are able to obtain insurance through other sources – such as private enterprise solutions or decentralized protocols – it is worth questioning whether FDIC insurance is worth it in the long run. Insurance from the FDIC can be a significant centralizing factor, as most people are likely to move to a platform that has their backing.
Evans said he believes FDIC insurance is “not necessarily wanted or needed,” as wherever there is more protection, “there happens to be more oversight and regulation,” which would mean insured companies would be “very safe and very regulated .”
These regulations could further limit those who are able to open accounts with these companies, adding to the issue of centralization already facing the crypto-insurance industry.
Bitcoin Foundation Chairman Brock Pierce told Cointelegraph that the crypto industry will still “see more companies trying to get it” after the latest wave of crypto lenders going under, which will make it “even more difficult for them now.”
Pierce didn’t expect FDIC insurance to “be a big deal or mean much in terms of general crypto adoption.” Whether it affects the use of cryptocurrency at all may only be clear once/if the FDIC insures cryptocurrency deposits.
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It’s worth noting that FDIC insurance can provide a false sense of security. Although no bank depositors have lost their money since the FDIC was launched, the reserve fund is not fully funded. The FDIC, according to Investopedia, is “normally below its total insurance exposure by more than 99%.”
The FDIC has at times borrowed money from the US Treasury in the form of short-term loans. Self-storage may, for the experienced cryptocurrency investor, continue to be a viable option even if a crypto firm is one day FDIC insured.
