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.
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.
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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