It’s been a rough couple of months for crypto enthusiasts.
Earlier this year, all types of digital currency began to slide and slide. Sometimes that included big, familiar names like bitcoin, and other times lesser-known coins like terra were swept up.
But either way, on the evening of June 13, it became apparent that the broader crypto market had taken some perhaps fatal blows, after the entire sector fell below $1 trillion in value.
Even more alarming, a major coin lending exchange, Celsius Network, has stopped allowing withdrawals from their accounts.
That spooked investors and reminded longtime market players that banking regulators sometimes fail to protect newer segments of the market.
“We are taking this necessary action for the benefit of our entire community to stabilize liquidity and operations while taking steps to preserve and protect assets,” the company said in a blog post.
Do cryptocurrencies need the FDIC?
Most consumers in the United States have traditionally relied on the country’s banks to secure and keep safe any assets they leave with that financial institution.
A simple example of this is that if you deposited money in a bank and then the bank was robbed, you would not lose any money, because your bank, like most banks in the United States, is insured by the Federal Deposit Insurance Corp.
This was not always the case, and in many parts of the world it still is not.
US regulators created the FDIC in 1933 under the Glass-Steagall Act, after the onset of the Great Depression caused many of the country’s banks to go out of business, taking their customers’ money with it.
Once the FDIC was established, anyone who put money in an American bank now knew that if anything happened to that bank, the funds that were deposited there were backed by the federal government.
The FDIC insures up to $250,000 in losses, a guarantee that helps keep the financial system stable and investors safe and secure.
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Not so with crypto.
The cryptocurrency sector itself is not FDIC insured, and the agency has been vocal about why that is.
“The FDIC is already taking steps to prevent crypto traders from being misled by false deposit insurance claims,” Money Research Collective reports.
“Together with the Consumer Financial Protection Bureau (CFPB), it issued a clear warning [May 17] For Businesses: Don’t misuse the FDIC name or logo, and don’t make false claims about FDIC insurance coverage if your customers aren’t eligible.”
The reason those assets are not backed by federal insurers is simple.
Like stocks and bonds and other speculative investments, cryptocurrencies are not legal tender and so far only have basic rules outlining what may or may not protect their value.
Crypto is still the wild west
The crypto industry has been trying for several years to assuage concerns from regulators, investors and international liquidity sources that the ecosystem in which it exists is safe.
One such safe is the oft-touted blockchain, which allows regulators and investors to see the chain of ownership of a crypto asset and, in theory, keep it safe within a known and accessible network.
Other moves to keep crypto safe have included tightening security checks, increasing transparency about who holds the key to a crypto asset, and attempting to describe as clearly as possible who is responsible for any potential loss. or theft.
In April 2022, the US Securities and Exchange Commission issued a new rule, SAB 121, outlining the obligations of cryptocurrency holders and cryptocurrency issuers to safeguard those assets.
That rule greatly intensified the obligations that holders of crypto assets had to disclose their value and how to keep them safe.
That practice was previously undescribed and largely left to individual organizations.
“When you invest in stocks or crypto, you risk losing everything,” Richard Smith, president and CEO of the Foundation for the Study of Cycles, told Money Research Collective.
“There’s no one to make sure your losses are never above a certain level,” he said.