Investors Beware: Your Crypto Is Not FDIC-Insured

Without any backup plan, investors watch crypto market sink below $1 trillion in value.

It has been a rough couple of months for crypto enthusiasts.

Starting earlier this year, all types of digital currency began to slip and slide. Sometimes that encompassed large, familiar names like bitcoin, and other times lesser-known coins like terra were swept up.

But either way, by the afternoon of June 13, it became obvious that the crypto market overall had taken some perhaps-fatal body blows — after the entire sector dropped below $1 trillion in value.

Even more alarming, a major coin lending exchange, Celsius Network, has stopped allowing withdrawals from its accounts.

That has spooked investors and reminded longtime market players that newer segments in the market are sometimes not protected by banking regulators.

“We are taking this necessary action for the benefit of our entire community in order to stabilize liquidity and operations while we take steps to preserve and protect assets,” the company said in a blog post.

Does Crypto Need the FDIC?

Most consumers in America have traditionally trusted the nation’s banks to insure and keep safe any assets that they leave with that financial institution.

A simple example of this is that if you deposited money in a bank, and the bank was then robbed, you wouldn’t lose any money — because your bank, like most banks in America, is insured by the Federal Deposit Insurance Corp.

This was not always the case, and in many parts of the world it still isn’t.

American regulators created the FDIC in 1933 under the Glass-Steagall Act, after the beginning of the Great Depression caused many of the country’s banks to fail entirely — taking their customers’ money with them.

Once the FDIC was established, anyone putting money into an American bank now knew that if something happened to that bank, the funds that were deposited there were backed by the federal government.

The FDIC insures up to $250,000 in losses, an assurance that helps keep the financial system stable and investors secure and calm.

Not so with crypto.

The crypto sector itself does not have FDIC insurance, and the agency has been vocal about why that is.

“The FDIC is already taking steps to prevent crypto traders from being misled by false claims about deposit insurance,” the Money Research Collective reports. 

“Along with the Consumer Financial Protection Bureau (CFPB), it issued a clear warning [May 17] for companies: Don’t misuse the FDIC’s name or logo, and don’t make false claims about FDIC insurance coverage if your customers aren’t eligible.”

The reason those assets aren’t backed by federal insurers is simple. 

Just like stocks and bonds and other speculative investments, crypto is not legal tender, and thus far has only basic rules outlining what may or may not protect its value.

Crypto Remains the Wild West

The crypto industry has tried for several years to assuage the concerns of regulators, investors and international sources of liquidity that the ecosystem it exists in is safe.

One of those fail-safes is the oft touted blockchain, which enables regulators and investors to see the chain of ownership of a crypto asset as well as, theoretically, to keep it safely within a known and accessible network.

Other moves to keep crypto safe have included stepping up security controls, upping transparency into who holds the key for a crypto asset, and attempting to outline as clearly as possible who is responsible for any potential loss or theft.

In April 2022, the U.S. Securities and Exchange Commission issued a new rule, SAB 121, that outlined the obligations of crypto holders and crypto issuers in safeguarding those assets.

That rule greatly stepped up what obligations holders of crypto assets had to disclosing their value and how to keep them safe.

That practice was previously not outlined and was largely left up to individual organizations.

“When you’re investing in stocks or crypto, you are taking risks that you may lose everything,” Richard Smith, chairman and chief executive of the Foundation for the Study of Cycles, told the Money Research Collective.

“There’s no one to make sure that your losses are never above a certain level,” he said.

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