About a month ago, FTX President Brett Harrison decided to send out a tweet.
There were many problems with this idea, but the most consequential was that it talked about US Federal Deposit Insurance in a way that, regardless of intent, amounted to a sleight of hand that gave investors a false impression of security.
Do you see what’s going on here? It doesn’t say that the crypto was insured by the Federal Deposit Insurance Corporation, or that the shares were, but that 1) direct deposits to FTX were held in FDIC-insured bank accounts and 2) the shares were held in brokerage accounts . which were insured by the Securities Investor Protection Corporation. He also claimed that these accounts were insured by the FDIC, which is not a thing.
In other words, if one of the FTX’s banks failed, you wouldn’t lose your cash, because those banks were (and presumably are) insured by the FDIC. If FTX itself fails, but your brokerage account doesn’t, you’ll presumably get “limited protection” from the SIPC, and if some rogue employee decides to fraudulently trade in your personal account without authorization, you should be complete .
Not surprisingly, the FDIC took issue with Harrison’s tweets.
In a cease-and-desist letter released Friday, the regulator says:
These statements appear to contain false and misleading representations that uninsured products are insured by the FDIC, as well as false and misleading statements about the scope and form of protection provided by FDIC deposit insurance and misappropriation of the name from the FDIC. These false and misleading statements represent or imply that FTX US is insured by the FDIC, that funds deposited with FTX US are placed, and remain at all times, in unnamed FDIC-insured bank accounts, that the accounts of ‘brokerage at FTX US are insured by the FDIC. , and that FDIC insurance is available for cryptocurrencies or stocks. In fact, FTX US is not insured by the FDIC, the FDIC does not insure any brokerage accounts, and FDIC insurance does not cover stocks or cryptocurrency. The FDIC only insures deposits in insured banks and savings associations (insured institutions), and FDIC insurance only protects against losses caused by failures of insured institutions. Consequently, such statements are likely to be misleading and may harm consumers. . .
In addition, the statement regarding the direct deposit of funds into “individually FDIC-insured bank accounts” does not identify the banks with which FTX has a direct or indirect relationship for the placement of deposits and in which the funds these consumers can be deposited.
In response, Harrison released a clarification on Friday:
We really didn’t mean to mislead anyone, and we didn’t suggest that FTX US itself, nor that crypto/non-fiat assets benefit from FDIC insurance. I hope this clarifies our intentions. Pleased to work directly with the FDIC on these important issues.
— Brett Harrison (@Brett_FTX) August 19, 2022
Well, he says he didn’t mean to mislead anyone! But at least one Redditor seemed surprised by the news, posting the line: “Just found out our crypto isn’t insured by the FDIC, only fiat and stocks are.”
Wow! (And stocks are not, in fact, insured by the FDIC! They are insured by SIPC.)
Now, regulators can be a bit touchy at the moment. The collapse in crypto prices so far this year has revealed that FDIC insurance confusion is surprisingly common among crypto holders, especially on platforms that have imploded.
Our colleague Joshua Oliver reported in July that Voyager Digital made rather more aggressive promises, at least before filing for bankruptcy: “Voyager has said in the past that the FDIC would refund the ‘USD funds’ in the event of ” the company” . . . failure,” he wrote. Both the FDIC and the Federal Reserve have gotten involved and sent a letter on July 28 asking the Canadian crypto-lending platform to stop saying its deposits were insured. (Voyager filed for Chapter 11 bankruptcy on July 6.)
By comparison, Harrison did not exactly promises FDIC insurance in case of FTX failure. But some users were still confused at the time.
Sam Bankman-Fried, a high-profile effective altruist and CEO of FTX, also addressed the FDIC’s letter in a tweet on Friday:
1) Clear communication is really important; sorry!
FTX is not FDIC insured (and we never said so on the website, etc.); the banks we work with. We never meant otherwise, and we apologize if anyone misunderstood. https://t.co/MHMSMDE8Le
— SBF (@SBF_FTX) August 19, 2022
In other words: they are very sorry if you didn’t get it, when Harrison repeatedly published tweets that mention FDIC insurance, the company actually did not to own FDIC Own Insurance. FTX only worked with banks that did.
And now that they “support” direct deposit, presumably directly and not through FDIC insured banks, they are “excited to work with the FDIC on this” 🙂
2) We are also happy to explore potential ways that individual accounts using direct deposit (which we now support) could be used, in the future, to further protect customers, and we would be happy to work with the FDIC on this, but just to be clear, FTX US is not insured by the FDIC.
— SBF (@SBF_FTX) August 19, 2022