The FDIC's Thoroughly Confusing Explainer on Pass-Through Deposit Insurance Coverage

This month has seen a financial crisis characterized by the financial meltdown that resulted in the freezing (and possible loss) of millions of customers' funds from Yotta, Copper, Mainstreet, Yieldstreet, Juno, Synapse, and more. Customers like me question the reliability and clarity of the Federal Deposit Insurance Corporation (FDIC) and its pass-through deposit insurance coverage. On May 10, 2024, the FDIC told the court that there was no applicable coverage for Yotta customers.

Suddenly, nearly three weeks later, on May 29th, the FDIC published an "explainer" on its website, attempting to clarify the intricacies of pass-through deposit insurance coverage under 12 C.F.R. §§ 330.5 and 330.7.

Good. An explainer. I need it because I don't understand the rules. As someone with two law degrees and a Ph.D., I am well-equipped to sort through complex legal and financial documents and regulations and understand them. However, after reading through the FDIC's explainer, I find myself more confused than ever about whether or not I have coverage for my deposits held through third-party arrangements like Yotta. The document states that pass-through deposit insurance is:

"not a separate ownership category but refers to arrangements where deposits are established by a third party for the benefit of other parties, known as principals."

While this definition seems straightforward, the following conditions and scenarios only muddy the waters.

The FDIC's document outlines three main conditions that must be met for pass-through insurance to be valid: "1. Ownership: The funds must be owned by the principal, not the third party. 2. Account Records: The account records of the insured depository institution (IDI) must indicate the agency nature of the account. 3. Identification: Records must identify the principals and their deposit ownership interests." These requirements are concerning because none are in the customer's control.

But this is the problem:

As a customer, I cannot know whether these requirements have been met. I don't have access to IDI's account records (what even is an IDI again?), nor do I know if my funds are properly titled in an FBO (for the benefit of) account. I don't have any way of knowing if I'm a "principal," as the FDIC requires.

The FDIC's explainer also discusses multi-tier arrangements, stating that "each level of the relationship must be disclosed in the account records, identifying the names and interests of the parties involved." Furthermore,

"the FDIC requires transparency at every level, ensuring that each entity in the chain reveals its role and the ultimate ownership of the funds."

Transparency in what way? Customers are left wondering how to verify that these disclosure requirements have been satisfactorily met. I have no idea what this kind of transparency means or, as a consumer, how to use it.

The FDIC's explainer is about as clear as mud. It's like handing someone a map written in hieroglyphics and expecting them to navigate a foreign city. The FDIC warns that "failure to meet the detailed requirements can result in uninsured deposits." Yes, we know that. But the FDIC conveniently shifts the responsibility of deciphering and complying with these byzantine rules onto the shoulders of everyday customers. It's as if the FDIC is saying, "Hey, we've given you this incredibly complex and confusing information. If you can't figure it out and your deposits go uninsured, that's on you!"

None of this explanation in the FDIC's document explains anything; it's a master class in obfuscation. The FDIC seems to have forgotten that its primary purpose is to protect depositors, not to send them on a wild goose chase through a labyrinth of financial jargon and red tape.

In light of the ongoing banking crisis and the devastating losses suffered by these customers, the FDIC must do better. It is not enough to publish a convoluted explainer, leaving even highly educated individuals scratching their heads. The FDIC needs to work towards simplifying its regulations, increasing transparency, and providing clear, accessible information to customers about their deposit insurance coverage.