About a month ago, FTX President Brett Harrison decided to send out a tweet.
There were many problems with this idea, but the most important was that he discussed US federal deposit insurance in a way that – regardless of intent – added up as a ruse giving investors a false impression of security.
What is it now?
See what’s going on here? It doesn’t say that the crypto was insured by the Federal Deposit Insurance Corporation, or that the stocks were, but that 1) direct deposits to FTX were held in bank accounts that were insured by the FDIC, and 2) stocks were held in brokerage accounts that were provided by the Securities Investor Protection Corporation. He also claimed that these accounts were FDIC insured, which they are not.
In other words, if one of FTX banks failed, you wouldn’t lose your money because those banks were (and apparently are) insured by the FDIC. If FTX itself fails, but your brokerage account does not, you will likely receive “limited protection” from SIPC, and if some rogue employee decides to fraudulently trade in your personal account without authorization, you need to heal. .
Unsurprisingly, the FDIC took issue with Harrison’s tweets.
In a cease and desist letter published 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 extent and manner of protection provided by FDIC deposit insurance and misrepresent the name of 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 brokerage accounts at FTX US are insured by the FDIC, and that FDIC insurance is available for cryptocurrencies or stocks. In fact, FTX US is not FDIC insured, the FDIC does not insure any brokerage accounts, and FDIC insurance does not cover stocks or cryptocurrencies. The FDIC insures only deposits held in insured banks and savings associations (insured institutions), and FDIC insurance protects only against losses caused by the failures of insured institutions. Therefore, these statements are likely to mislead and potentially harm consumers. . .
Furthermore, the statement regarding the direct deposit of funds into ‘individual FDIC-insured bank accounts’ does not identify the bank(s) with which FTX has a direct or indirect deposit-making relationship and in which such funds are deposited. customers can be deposited.
In response, Harrison posted a clarification on Friday:
We really did not mean to mislead anyone and did not suggest that FTX US itself, or crypto/non-fiat assets, benefit from FDIC insurance. I hope this clarifies our intentions. Happy to work directly with the FDIC on these important topics.
— Brett Harrison (@Brett_FTX) August 19, 2022
Well, he says he didn’t mean to deceive anyone! But at least one Redditor seemed surprised by the news, posting the line: “Just found out our crypto is not FDIC insured, only fiat and stocks are.”
oops! (And stocks are not, in fact, insured by the FDIC! They are insured by SIPC.)
Now, the regulators may be somewhat sensitive at the moment. The year-over-year decline in crypto prices has revealed that FDIC insurance confusion is surprisingly common among crypto holders, especially on platforms that have exploded.
Our colleague Joshua Oliver reported in July that Voyager Digital made much more aggressive promises, at least before filing for bankruptcy: “Voyager has said in the past that the FDIC would refund ‘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.)
In comparison, Harrison did not JUST the promise of FDIC insurance in the event of an FTX failure. But some users were still confused at the time.
High-profile effective altruist and FTX CEO Sam Bankman-Fried also addressed the FDIC’s letter in a Friday tweet:
1) Clear communication is really important; excuse me!
FTX does not have FDIC insurance (and we have never said so on the website etc.); the banks we work with do. We never thought otherwise and we apologize if anyone misinterpreted it. https://t.co/MHMSMDE8Le
— SBF (@SBF_FTX) August 19, 2022
In other words: They’re very sorry if you didn’t realize this, when Harrison repeatedly posted tweets mentioning FDIC insurance, the firm actually did not HAVE FDIC insurance itself. FTX just worked with the banks that worked.
And now that they “support” direct deposit – apparently directly and not through FDIC insured banks – they are “excited to work with the FDIC on this” 🙂
2) We are also excited 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 would be excited to work with the FDIC to this, but be clear FTX US is not insured by the FDIC.
— SBF (@SBF_FTX) August 19, 2022