Crypto and Fiat Stored on Apps Might Not Be Insured by The FDIC

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In a report recent­ly pub­lished by the Con­sumer Finan­cial Pro­tec­tion Bureau (CFPB) of Amer­i­ca, reg­u­la­tors warn that cryp­to and fiat held on mobile apps may not actu­al­ly ben­e­fit from the FDIC’s pol­i­cy of insur­ing up to $250k per depositor.

Non-Bank Services Not Covered

Accord­ing to the report, an unfor­tu­nate con­se­quence of the rise of pay­ment ser­vices and apps such as Pay­Pal or Ven­mo is that con­sumers are often giv­en the impres­sion that in the event of the plat­form going bank­rupt, the gov­ern­ment will reim­burse user funds stuck with these services.

How­ev­er, this is not the case. For funds to be reim­bursed by the FDIC or NCUA, they would have to be deposit­ed at an FDIC or NCUA-insured bank. Plen­ty of pay­ment ser­vices do not hold user funds in escrow at one of these banks. Often, these pay­ment ser­vices invest user funds into stocks and bonds as a way of gen­er­at­ing prof­it in order to keep the ser­vice free or low-cost for the end user.

The report notes that this aspect is often obfus­cat­ed by the TOUs of the pay­ment platforms.

Platforms Not Obliged to Report Deposits

Anoth­er key dif­fer­ence between pay­ment ser­vices and banks is that the banks are required by fed­er­al law to pro­vide detailed infor­ma­tion on cus­tomer deposits to the FDIC and oth­er reg­u­la­tors. Pay­ment ser­vices, on the oth­er hand, have no such requirement.

“While the core ser­vice of non­bank pay­ment plat­forms is to pro­vide a mech­a­nism to send funds from one per­son to anoth­er, these apps also facil­i­tate a grow­ing set of relat­ed finan­cial prod­ucts and ser­vices, includ­ing offer­ing deb­it cards, cred­it cards, BNPL loans, inter­na­tion­al remit­tances, and cryp­to asset trans­ac­tions. […] While banks and cred­it unions are required to pro­vide detailed infor­ma­tion on their total deposits on a reg­u­lar basis, these enti­ties cur­rent­ly have no such require­ment under fed­er­al law.”

Although the impor­tance of self-cus­tody is repeat­ed­ly rein­forced to the cryp­to com­mu­ni­ty, the fail­ure of FTX – which was explic­it­ly named in the report – has also prompt­ed the CFPB to remind con­sumers that they may be left high and dry if they do not secure their own assets.

Despite the good deals some ser­vices offer when buy­ing cryp­to, always remem­ber to prac­tice self-cus­tody when it comes to your cryp­to stash.

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