U.S. banking regulator instructs banks to curb confusing crypto claims on deposit insurance

The United States banking regulator, Federal Deposit Insurance Corporation (FDIC), has issued a new advisory to banks in a bid to curb customer confusion regarding cryptocurrencies.

In the advisory published on July 29, the FDIC stated that it was concerned that customers might be confused in understanding how safe their money is when invested in cryptocurrencies. 

According to FDIC, the advisory mainly targets companies that offer both uninsured crypto products and insured bank deposit products. The agency stressed that banks need to ensure customers understand which of their funds will be insured, especially in the event of a collapse.

“Inaccurate representations about deposit insurance by non-banks, including crypto companies, may confuse the non-bank’s customers and cause those customers to mistakenly believe they are protected against any type of loss,” FDIC said. 

Banks to monitor crypto companies 

Part of the new advisory requires banks to confirm and monitor crypto companies, so they do not misrepresent the availability of deposit insurance. In such a case, the FDIC called on banks to take the necessary measures to address any misrepresentations.

Additionally, the agency stated that banks should have sufficient risk management measures in place, ensuring that any services provided by third-party crypto companies comply with the law. 

The advisory also pointed out the importance of clear communication requiring crypto companies that advertise or offer FDIC-insured products to minimize confusion through clear messages. 

Such entities were challenged to ensure that their customers understand that they are not an insured bank and to communicate the risks of such as high price volatility of cryptocurrencies. 

Nortably, the FDIC had earlier warned banks under its jurisdiction  regarding engaging with cryptocurrencies such as Bitcoin (BTC) noting that they pose a risk to financial stability. 

U.S. focus on crypto regulations

The latest communication from the FDIC forms part of the ongoing initiative by the U.S. to regulate the crypto sector. Notably, since President Joe Biden signed an Executive Order on crypto development, several agencies have issued their views on the sector. 

Additionally, a bi-partisan bill before the congress by Wyoming Senator Cynthia Lummis seeks to offer comprehensive crypto regulations. 

The push toward crypto regulations has been motivated by the recent market meltdown and high-profile incidents like the Terra (LUNA) ecosystem crash. The current market conditions have pushed firms like crypto lending platform Celsius into bankruptcy while holding customer deposits with authorities focusing on the need to protect customers.