The FDIC recently sent a warning letter to a fintech firm that made misleading references to the availability of deposit insurance in promotional materials used for various crypto-related products.  Unbanked, Inc, which provided crypto-backed debit card and related services, had previously announced a wind down of operations due to funding issues and increased regulatory scrutiny of the industry. According to an FDIC letter dated August 4, 2023, Unbanked erroneously implied that FDIC insurance was available for cryptocurrency and that FDIC insurance would cover crypto-related losses.  The company partnered with FDIC-insured banks to offer accounts that allowed customers to hold the proceeds of crypto trading transactions.  However, the FDIC cited statements regarding “FDIC-insured crypto bank accounts” on various social media platforms and marketing materials that failed to disclaim the availability of deposit insurance for crypto assets as evidence that Unbanked had falsely implied that (i) FDIC is available for cryptocurrency and (ii) FDIC insurance protects against cryptocurrency losses.  In addition, while acknowledging that customer funds were placed in insured depositary institutions, the FDIC argued that Unbanked’s failure to identify the institutions deprived the consumer of information necessary to understand the “extent or manner of deposit insurance provided.”

The Unbanked letter is the most recent example of regulatory scrutiny of fintech companies that operate in the cryptocurrency space.  In recent months, several cryptocurrency fintechs, including Unbanked, have shuttered as the regulators have made it more difficult for such firms to operate in partnership with banks and banks are increasingly unwilling or unable to partner with such firms.  The letter contains a caution for firms that remain active in this market that promotional materials relating to bank partnerships must identify the insured institution by name and specify the nature of any pass-through deposit insurance and that the omission of this information is a violation of the deposit insurance regulations.  Moreover, the letter warns that an express disclaimer of deposit insurance coverage must accompany any statements relating to funds held in cryptocurrency.

In the wake of the failure of several banks that provided services to the cryptocurrency market, regulators have increased scrutiny of bank partnerships with fintech firms that offer such services, and many banks have abandoned plans to partner with such firms.  It is clear that the regulators are continuing to sort out the contribution of cryptocurrency activity to the demise of the failed banks and that we are still awaiting the development of a comprehensive regulatory framework for financial institutions that enter the cryptocurrency market.   However, for banks that remain connected to the cryptocurrency market through fintech partners, the Unbanked letter highlights the importance of continuing due diligence on the manner in which the bank relationship is communicated (or not communicated) to the firm’s clients as the failure to do so may create a regulatory issue for both parties.