Gemini reportedly claimed repeatedly that its the assets of customers using its Earn product were safe thanks to being backed by the FDIC

The New York Department of Financial Services (NYDFS) is investigating crypto exchange Gemini over claims it made related to the safety of its customers’ assets, according to an Axios report on Monday.

Last year, Gemini reportedly claimed repeatedly that its the assets of customers using its Earn product were safe thanks to being backed by the Federal Deposit Insurance Corporation (FDIC). It is against the law for a financial firm to imply that an uninsured product is FDIC-insured.

Gemini halted withdrawals from its Earn product in November last year amidst the fallout from the collapse of fellow exchange FTX.

Around $900 million is estimated to be frozen on the platform as a result. Gemini itself blamed the halt on a similar freeze at the now bankrupt crypto lender Genesis, a unit of the blockchain conglomerate Digital Currency Group (which also owns CoinDesk), on which the exchange had invested its Earn customers’ funds.

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U.S. Sen. Pat Toomey said whistleblowers had informed him that the FDIC was pressuring banks to stop providing services to crypto companies.

The Federal Deposit Insurance Corporation (FDIC) may be leaning on banks to prevent them from providing services to cryptocurrency companies, U.S. Sen. Pat Toomey (R-Pa.) said Tuesday, citing communications he had received.

In a letter directed to Acting FDIC Director Martin Gruenberg, Toomey wrote that he had heard from “affected parties” and whistleblower communications which claimed that the federal bank regulator had tried to “deter banks from doing business with lawful cryptocurrency-related companies,” even though providing services to these companies is not illegal. Toomey asked the regulator to confirm whether any FDIC official had indeed asked banks to not do business with crypto firms, and if so, to explain why.

American Banker first reported the letter on Tuesday.

Toomey referenced “Operation Choke Point,” a former FDIC and Department of Justice initiative whose stated purpose was to pressure banks not to provide services to payday lenders and financial fraud charges, but which appeared to also pressure banks not to provide services to companies engaging in legal activities like gun sellers.

“According to whistleblower communications that we have corroborated, personnel in the FDIC’s Washington, D.C. headquarters are urging FDIC regional offices to send letters to multiple banks requesting that they refrain from expanding relationships with crypto-related companies, without providing any legal basis for sending such letters,” Toomey wrote. “… As I understand it, in one or more of these cases, a bank planned to give customers access to a crypto-related company’s trading platform via the bank’s mobile or internet banking app.”

FDIC officials also allegedly directed a regional branch to “downgrade” the classification of a loan made by a bank to a crypto company, which Toomey called “highly atypical.”

In a statement, the FDIC said, “The FDIC is acting consistent with longstanding legal authorities to ensure that banks engaging in crypto-related activities are doing so in a safe and sound way that protects consumers. This may involve the FDIC requesting that an institution delay initiating or refrain from expanding crypto-related activities until supervisory feedback is taken into account. Given the risks readily apparent in the crypto-asset markets, these are necessary and appropriate actions to take.”

The regulator has published statements before directing banks to be cautious about working with crypto companies.

In April, the FDIC published an open letter addressed to any banks or other institutions it oversees, directing them to contact the FDIC before it engages in “a crypto-related activity.” The regulator said it would assess the information provided by the bank to check for “safety and soundness,” and provide feedback if needed.

“The information requested by the FDIC will vary on a case-specific basis depending on the type of crypto-related activity. However, the initial notification to the FDIC Regional Director should describe the activity in detail and provide the institution’s proposed timeline for engaging in the activity,” the letter said.

The letter is similar to one published by the Federal Reserve this week, which also directs banks under its supervision to contact the central bank prior to engaging in crypto activities.

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All FDIC-supervised institutions have been asked to provide the federal banking regulator with information about their “crypto-related activities.”

A top U.S. banking regulator has asked banks to report on their “crypto-related activities,” citing potential “safety and soundness risks as well as financial stability concerns” resulting from exposure to crypto assets.

On Thursday, the Federal Deposit Insurance Corporation (FDIC) issued a financial institution letter – a letter sent to CEOs of FDIC-insured banks – requesting that banks should notify their regional FDIC director of their crypto activities. This request applies to both current and future crypto-related activities.

According to the letter, the FDIC will review the information, ask more questions if necessary, and then issue “relevant supervisory feedback.”

The new reporting requirements are a step-up from previous FDIC statements on crypto.

Under Acting Chair Martin Gruenberg, the banking regulator has issued warnings about the potential for the “rapid introduction of…digital asset products into the financial system” to pose systemic risks. In February, Gruenberg said the FDIC and other regulators needed to provide “robust guidance” to the banking industry on how to manage the risks posed by crypto.

Thursday’s letter is a signal that the banking regulator is now getting serious about cracking down on crypto.

Because the vast majority of banks – including every national bank – in the U.S. are FDIC-insured, the new requirements mean that nearly all banks with crypto exposure – including Wall Street titans like Bank of America and Goldman Sachs – must now disclose their crypto activities to the regulator.

The FDIC isn’t the only banking regulator turning its eye towards crypto-related banking activity.

Last month, Office of the Comptroller of the Currency (OCC) head Michael Hsu warned banks that trading crypto derivatives could result in extra regulatory scrutiny.

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