In a letter dated August 16, 2022, U.S. Sen. Pat Toomey addressed FDIC acting chairman Martin Gruenberg to inquire about some recent FDIC actions that came to light by way of whistleblower reporting. Toomey said that the affected parties came forward to reveal that their banks received letters from the FDIC discouraging the bank from doing business with legitimate crypto companies:
According to whistleblower communications that we have corroborated, personnel in the FDIC’s Washington, D.C., headquarters are urging FDIC regional offices to send letters to multiple banks requesting that they refrain from expanding relationships with crypto-related companies, without providing any legal basis for sending such letters,
The letter also suggests that the FDIC may be abusing its supervisory powers to deter banks from extending credit to crypto-related companies. According to whistleblower reports,
FDIC headquarters employees have contacted FDIC regional office bank examination staff to question their review of a loan made by a bank to a crypto-related company and to urge them to downgrade their classification of the loan. It is my understanding that it is highly atypical for FDIC headquarters personnel to be involved in reviewing an individual loan.
Toomey goes on to say that there was nothing unusual about the loan and that it was too small to pose any significant risk. Hence the FDIC communications with the bank raise important questions about the FDIC’s involvement and apparent efforts to “deter banks from extending such loans in the future.” The key concern here is that no rationale was provided for the regulator’s involvement.
In a statement, the FDIC responded,
“The FDIC is acting consistent with longstanding legal authorities to ensure that banks engaging in crypto-related activities are doing so in a safe and sound way that protects consumers. This may involve the FDIC requesting that an institution delay initiating or refrain from expanding crypto-related activities until supervisory feedback is taken into account.”
The question remains as to the substance of this supervisory feedback. The reasons for increased caution were simply said in the FDIC statement to be based on “the risks readily apparent in the crypto-asset markets.”
The FDIC, also known as the Federal Deposit Insurance Corporation, is an independent federal agency that insures deposits in U.S. banks (up to 250K per account) and other types of depository institutions. It was created to guard against bank failures and “bank runs,” which tend to go hand-in-hand. Unless providing a modest loan to a crypto firm posed a material risk for the bank, it is unclear why the FDIC felt the need to intervene.
One possibility is that multiple crypto exchanges have left a bad taste in the agency’s mouth following their alleged “false and misleading statements” suggesting their assets were FDIC-insured.
The US agency said in a statement Friday said that it found evidence that the five companies — which also included Cryptonews.com, Cryptosec.info, SmartAsset.com, and FDICCrypto.com — posted false statements on their websites and social media accounts that suggested certain crypto products or stocks held in brokerage accounts are FDIC-insured. (Bloomberg)
Crypto exchanges are not and cannot currently be FDIC-insured. The same goes for dollars and cryptocurrency funds that are held on exchanges or with custodians. This is why crypto veterans do not keep their crypto on exchanges, but instead on hardwallets and verified software wallets.
