Last month, cryptocurrency lending company Voyager Digital went bankrupt after getting caught in the chain reaction that Three Arrows Capital (3AC) also got into. But Voyager previously claimed that customers’ deposits were insured with the government. However, the Federal Reserve, the US central bank, emphasizes that this is not the case at all, and that the company is no longer allowed to claim this.
Customers not insured
dat writes the Federal Reserve in a press release. Voyager stated on its website, in the app and on social media accounts, according to the central bank, that customer deposits were insured through the Federal Deposit Insurance System (FDIC). That system was established after the housing crisis in 2008 to give people the assurance that not all their money would evaporate as soon as their bank gets into financial trouble. It is therefore an insurance policy for customers, and not for the bank itself.
In fact, all traditional banks in the US are mandatory members of this. But this protection does not apply to companies that label themselves as ‘crypto-banks’. Voyager offered interest rates and loans on digital assets, which were also quite high.
It is not clear whether the company realized it could not make this claim. The bank had accounts with Metropolitan Commercial Bank, a traditional bank to which this system does apply. Some of Voyager’s money was deposited with this bank, according to the Federal Reserve. However, in this case, the FDIC protects against the bankruptcy of this traditional bank, and not against problems at Voyager.
Traditional Banks vs. Crypto Banks
Voyager was actually a kind of bank, but it was one that took a lot of risk. While cryptos are inherently risky, Voyager also offered customers the opportunity to borrow from them and earn hefty interest on the already risky assets.
Traditional banks are not allowed to take risk just like that, and certainly not to this extent. There it is Basel III regulatory system designed for. Banks regulated below are only allowed to use a certain percentage of their deposits for certain financial products. If a bank wants to put money in crypto, it must do so with enormous caution. That is something that some crypto companies could clearly have learned from.
