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Cryptocurrency is confusing, and prices for bitcoin and other cryptos are extremely volatile. What's more, the federal government now feels it's necessary to reiterate that money invested in cryptocurrency isn’t safeguarded the way cash at banks is protected.
The Federal Deposit Insurance Corporation (FDIC) issued a warning to banks on Friday to make sure the crypto companies they partner with are accurately representing the risks involved with digital assets. The FDIC, which is the regulator that insures cash kept in banks on behalf of consumers, is especially concerned about the confusion that might ensue when customers invest money at institutions that offer both cash deposit and crypto products.
“Inaccurate representations about deposit insurance by non-banks, including crypto companies, may confuse the non-bank’s customers and cause those customers to mistakenly believe they are protected against any type of loss,” the FDIC’s advisory reads.
Is crypto protected by FDIC insurance?
The FDIC will guarantee up to $250,000 in cash deposits at thousands of banks across the country. That means that if the bank goes under, customers are guaranteed to get their money back. This protection only applies to certain deposits like checking accounts, savings accounts and certificates of deposit (CDs) — not investment products like stocks or cryptocurrency.
“When you're investing in stocks or crypto, you are taking risks that you may lose everything,” Richard Smith, chairman and chief executive of the Foundation for the Study of Cycles, a nonprofit that studies recurring patterns in the economy, science and the arts, previously told Money. “There's no one to make sure that your losses are never above a certain level.”
Crypto assets are risky
The FDIC’s broad warning followed a letter the FDIC and Federal Reserve sent on Thursday to the crypto broker Voyager Digital, warning the firm to stop claiming that its customers’ crypto deposits are protected by FDIC insurance — they aren’t.
Voyager is one of several crypto companies that was forced to suspend withdrawals and trading (preventing customers from accessing their money) amid a massive downturn in the cryptocurrency market.
Other crypto companies have also temporarily suspended operations, and some cryptos have completely collapsed, wiping out billions of dollars of investments. That and the looming threat of a recession have helped lead to a loss of confidence in the crypto market in general.