The Consumer Financial Protection Bureau (CFPB) recently issued a reminder that digital payment apps such as PayPal and Venmo, along with crypto exchanges, lack Federal Deposit Insurance Corporation (FDIC) insurance. Billions of dollars are stored in these popular platforms, but should they go under, there’s no guarantee clients will recover their funds, posing an inherent danger to their users.
These digital payment apps have become viable alternatives to traditional banking methods, yet they lack the protections that banks and credit unions offer to keep funds safe. Crypto exchanges like Coinbase and Gemini also fall under this category, as they’re not insured by the FDIC. Bankrupt firms, including Voyager Digital, Celsius, and BlockFi, operated banking services without government protection as well.
The FDIC has been targeting crypto companies for months, attempting to stop them from making misleading claims about their insured status. Voyager Digital, for instance, received a cease and desist letter in July 2022 from the FDIC, alleging that the brokerage firm falsely advertised itself as an insured institution. Customers who deposited funds with Voyager, believing they had insurance, were misled and may not have immediate access to their funds.
Voyager had claimed that deposits of up to $250,000 were insured through the FDIC because they partnered with FDIC-backed Metropolitan Commercial Bank to maintain a deposit account on behalf of users. However, Voyager itself was not insured by the FDIC, meaning that customers who invested through its cryptocurrency platform wouldn’t receive insurance coverage in case Voyager failed.
Furthermore, the FDIC informed ChainSec.io (formerly known as CryptoSec.info) in August 2022 that the crypto safety information provider was incorrectly advertising certain crypto exchanges as being FDIC insured. The letter emphasized that the FDIC does not insure any crypto exchanges.
While digital payment apps and crypto exchanges offer convenient and innovative ways to handle transactions, users must be cautious about potential risks associated with them. The lack of FDIC insurance raises concerns about the safety of their funds on these platforms. It remains to be seen whether stricter regulations will be enacted to address this issue and protect consumers from potential losses.
Source: Blockworks
