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Cryptocurrency trading firm partners with community bank, gets FDIC protection


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According to Market Intelligence, April 2023

Cryptocurrency trading firm partners with community bank, gets FDIC protection

The largely unregulated cryptocurrency trading realm now has one avenue to federal deposit insurance.

Cryptocurrency prime dealer and trading firm SFOX Inc. announced a partnership with New York-based M.Y. Safra Bank FSB to offer deposit accounts backed by the Federal Deposit Insurance Corp. FDIC protection, which is normally associated with checking and savings accounts, protects bank customers for up to $250,000 per financial institution.

The cryptocurrency industry has been described as the Wild West, and it has seen wild price swings in the recent past. Regulated financial products within the cryptocurrency industry remain limited. The launch of bitcoin futures in December 2017 was a big step toward securing more traditional products, but Cboe Global Markets Inc., the first company to launch bitcoin futures, announced in March that it would halt the practice.

Although SFOX says this is the first time FDIC-insured accounts will be linked to a cryptocurrency prime dealer, the insurance will only protect the cash portion of a cryptocurrency trade. Deposit insurance does not apply to bitcoin, ether, or any other digital assets bought on SFOX's exchange.

M.Y. Safra does not have any exposure to cryptocurrencies, spokesperson Gabriel Fekete said in an email. The bank does not take deposits in cryptocurrencies, and all of its assets and liabilities are in U.S. dollars, Fekete said.

SFOX started looking for a bank partner two years ago, and its relationship with M.Y. Safra started to expand about 18 months ago, said Daniel Kim, head of growth at SFOX.

The new partnership will allow traders to keep funds in accounts under their own names, a level of transparency not seen with all cryptocurrency exchanges, Kim said in an interview. More often, users' funds are held in a pool with little clarity about how those funds are being used, he said.

Segregated accounts could have better protected users in the recent bankruptcy of Vancouver-based Quadriga Fintech Solutions Corp. The Canadian market firm owes 115,000 clients about $193 million in cryptocurrencies and cash. Earlier this month, cryptocurrency exchange Binance said hackers stole 7,000 bitcoins in an earlier large-scale security breach, the latest in a long string of thefts in the digital currency industry.

"With complete account segregation, this gives you full visibility, making sure that your funds aren't being misappropriated," Kim said in an interview. Individuals would know how much they owe or are owed if something ever happens to an exchange. "We want to make sure that we can hand-hold all our customers because we understand that this is a new market," he said.