Dive Brief:

• The Federal Deposit Insurance Corp. (FDIC) issued an advisory Friday clarifying boundaries within relationships between crypto companies and the banks on which they rely.
• The advisory came a day after the FDIC and the Federal Reserve sent Voyager Digital a cease-and-desist order giving the bankrupt crypto platform two business days to remove any false and misleading statements regarding deposit insurance from the company’s website, mobile app, social media accounts, marketing, advertising and consumer-facing text.
• A spokesperson for the FDIC said last month the regulator was investigating Voyager’s consumer-facing language after the crypto platform’s banking partner, Metropolitan Commercial Bank, clarified that individual Voyager customer accounts are only eligible for deposit insurance if the bank — not Voyager — were to fail.

Dive Insight:

In its Friday advisory, the FDIC reinforced Metropolitan’s point, saying it “only pays deposit insurance after an insured bank fails.” 

“FDIC insurance does not protect a non-bank’s customers against the default, insolvency, or bankruptcy of any non-bank entity, including crypto custodians, exchanges, brokers, wallet providers or … ‘neobanks,’” the regulator wrote. 

“Deposit insurance covers deposit products offered by insured banks, such as checking accounts and savings accounts,” the FDIC clarified, adding that non-deposit products, such as stocks, bonds, money market mutual funds, securities, commodities or crypto assets are not insured.

While Thursday’s order targeted Voyager in particular — and served as a warning to other crypto platforms — Friday’s advisory put banking partners on notice, emphasizing that “risks are elevated when a non-bank entity offers crypto assets to the non-bank’s customers, while also offering an insured bank’s deposit products.”

Banks need to “assess, manage, and control risks arising from all third-party relationships, including those with crypto companies,” the FDIC wrote Friday. That means monitoring their partners’ marketing materials and disclosures to ensure they don’t misrepresent the availability of deposit insurance — and addressing misrepresentations when they happen, the regulator wrote.

“Misrepresentations and customer confusion could cause concerned consumers with insured-bank relationships to move funds, which could result in liquidity risk to banks and, in turn, could potentially result in earnings and capital risks,” the FDIC wrote Friday.

Voyager last month suspended trading, deposits, withdrawals and loyalty rewards on its platform ahead of filing for Chapter 11 bankruptcy protection. The company has roughly $1.3 billion in cryptocurrency on its platform and holds more than $350 million in cash in a Metropolitan account for the benefit of customers.

Clients with U.S. dollar deposits in their accounts “will receive access to those funds after a reconciliation and fraud prevention process is completed with Metropolitan Commercial Bank,” Voyager CEO Stephen Ehrlich wrote last month. But customers may have to wait longer to receive any held-up crypto. The company said it intends to pass to customers a combination of crypto from their accounts, along with proceeds from a recovery of debt owed by hedge fund Three Arrows and shares of a reorganized Voyager.

In Thursday’s order, the FDIC took issue with any allusion Voyager may have made that would have led the crypto platform’s customers to believe their deposits were insured — specifically in the event of Voyager’s failure. 

“Based on the information we have to date, it appears that the representations likely misled and were relied upon by customers who placed their funds with Voyager and do not have immediate access to their funds,” the FDIC wrote Thursday. 

The Fed, Metropolitan’s primary regulator, also signed on to the order.

Reports last month of an FDIC investigation into Voyager’s language concerning deposit insurance came as news outlets noted recent, subtle tweaks to that wording.

“In the rare event your USD funds are compromised due to the company or our banking partner’s failure, you are guaranteed a full reimbursement (up to $250,000),” Voyager wrote in 2019, according to The Wall Street Journal.

As of Thursday, language on Voyager’s website reads: “Your USD is held by our banking partner, Metropolitan Commercial Bank, which is FDIC insured, so the cash you hold with Voyager is protected.” 

Another passage now reads: “Cryptocurrency held on the Voyager Platform is not protected by FDIC insurance or any other government-backed or third party insurance.”

A Voyager spokesperson last month told the Journal the company’s disclosure statement wasn’t new. A spokesperson for the crypto firm did not immediately comment to Bloomberg, Reuters or the Journal regarding Thursday’s letter.

The order comes roughly two months after the FDIC issued a final rule barring companies from making misrepresentations regarding deposit insurance or misusing the FDIC name or logo. Companies found in violation may be subject to enforcement actions including fines.

A “prompt response” — due Monday — by Voyager would not prevent the FDIC from “taking any further action, as appropriate,” the regulator said. It did, however, allow Voyager 10 days to gather any documentation surrounding disputed deposit insurance-related language the crypto firm argues is true.