Collapse of FTX is a Reminder to Check the Safety of Bank, Savings and Loan Association, Credit Union, Brokerage and Retirement Accounts

The recent collapse of crypto exchange FTX should raise a question among federal employees and retirees who are savers and investors:

What happens to an individual’s saving and investment assets if the company that holds an individual’s bank, savings and loan association, credit union, brokerage, qualified retirement plan (such as 401(k) plan) or crypto account fails?

The answer varies depending on the type of account and in what type of institution the funds are deposited.

This column discusses what happens to a saver’s or to an investor’s assets when the institution they have deposited or invested their money in fails.

Bank and Savings and Loan Association Accounts

Banks and savings and loan associations have failed in the past and unfortunately some continue to fail. Fortunately, deposits in bank and savings and loan association checking and savings accounts are among the safest of all assets.

Bank and savings and loan association deposits have been insured by the Federal Deposit Insurance Corporation (FDIC) since the Great Depression. The FDIC protects depositors of insured banks and savings and loan association located in the US against the loss of their deposits if an insured bank or savings and loan association fails. The FDIC insures all deposit accounts including checking and savings accounts, money market accounts, and certificated of deposit. The standard insurance amount is $250,000 per depositor per insured bank for each account ownership category.

The table below illustrates how a family of four – two spouses with two children – could qualify for up to $2 million in FDIC coverage at one’s insured banks, and that these are the only accounts that the family has at the bank.

FDIC Insurance Coverage Single Family with Multiple Accounts*

Individuals with balances that exceed the $250,000 limit can protect themselves by transferring the excess deposits to an account at a different FDIC insured bank.

Credit Union Accounts

Federal employees who have checking and savings accounts, money market accounts, and certificates of deposits in a Federal Credit Unions have their accounts insured through the National Credit Union Administration (NCUA). NCUA provides the equivalent standard insurance amount of $250,000 per depositor per insured credit union for each account ownership category as FDIC does for insured US banks and savings and loan associations.

Brokerage Accounts

If a brokerage fails, customer assets should be safe. The US Securities and Exchange Commission prohibits broker-dealers from using customer money or co-mingling it with the firm’s assets.

The Securities Investor Protection Corporation (SIPC) provides protection for individuals who invest through member brokerage firms. The purpose of the SIPC is to protect (insure) investors when the broker-dealer fails financially and cannot satisfy customer (investor) claims. It does not protect the investor from losses incurred due to the decline in in market value of securities.

SIPC protection of customers with multiple accounts is determined by “separate capacity.” Each separate capacity is protected up to $500,000 for securities and cash, including a $250,000 limit for cash only. An investor could have a brokerage account in his or her own name, a traditional individual retirement account, a Roth IRA account and a joint account at the same brokerage firm. Each may be eligible for up to $500,000 of protection according to the SIPC.

SIPC replaces missing securities including stocks, bonds, mutual funds, exchange-traded funds and certificates of deposits. It does no cover investments that are not Securities and Exchanges (SEC) registered.

Qualified Retirement Plan Accounts

If a company with a qualified retirement plan (such as a 401(k) plan or 403(b) plan files for bankruptcy, the retirement plan’s assets are protected. The federal Employee Retirement Income Security Act (ERISA) law requires the retirement plan assets to be held in trust. The trust protects a plan participant’s money in case the qualified retirement plan administrator goes bankrupt.

Cryptocurrency Accounts

If a company that holds a cryptocurrency investor’s money fails, then there is no guarantee that the investor’s money will not go to pay the firm’s creditors.

Some customer agreements for cryptocurrency exchanges and brokers suggest that customer assets are shielded from creditors. But at least one cryptocurrency exchange suggests that it is unclear whether a bankruptcy court would agree that an investor’s cryptocurrency assets are shielded from the firm’s creditors.

When a cryptocurrency investor transfers cash to a cryptocurrency exchange in order to make purchases, the company often holds the money in a FDIC-insured bank account where the money is available for trading. If the cryptocurrency exchange fails, then investors should be able to access any cash they have in a linked bank account. This assumes that the cryptocurrency exchange firm titled the account properly (see above, FDIC titling of assets). However, the FDIC protections do not extend to any crypto assets that an investor has purchased.

In August 2022, the FDIC accused several cryptocurrency exchanges of making false representations. In particular, on their web sites and social-media accounts the cryptocurrency exchanges stated or suggested (with no basis) that certain crypto-related products are FDIC-insured.