Binance.US Says Dollar Deposits Aren't FDIC Insured

Binance.US emailed users with two big pieces of news this week. First, dollar deposits on the platform aren't FDIC insured, as previous posts had suggested. FDIC insurance protects deposits in insured bank accounts against bank failure, but that coverage does not extend to cryptocurrencies.

Second, Binance.US says customers will no longer be able to withdraw dollars from the platform. "In the event that customers wish to withdraw U.S. dollar funds from their account, they may do so by converting U.S. dollar funds to stablecoin or other digital assets, which can subsequently be withdrawn," said the message.

If you're a Binance.US customer, it's worth understanding what these moves mean for you. 

Is crypto ever covered by FDIC insurance?

One of the many risks involved in crypto investing is that there is little regulation and limited investor protection. If you have assets on a crypto platform that collapses, your funds could get tied up in lengthy bankruptcy proceedings and there are no guarantees you will get them back.

Some crypto platforms, such as Coinbase and Gemini Exchange, say dollar deposits from U.S. investors are held in FDIC-insured banks and benefit from what's called "pass-through FDIC insurance." But that only protects those dollars if the bank fails. It would not protect them if the crypto exchange itself collapsed. 

We've seen various crypto platforms -- such as the now-defunct Voyager -- claim they offer FDIC protection and try to give the impression they are as safe as banks. However, crypto exchanges do not have the same protections as banks -- Not in terms of FDIC insurance, and not in terms of the rules and regulations about how they handle your money.

The FDIC is very clear that it does not insure cryptocurrency assets and only covers money held in insured banks. If you have money with a credit union, it is covered by the National Credit Union Share Insurance Fund (NCUSIF). Cash and securities held with a brokerage are protected by the Securities Investor Protection Corporation (SIPC). But even if you use a stock broker that sells cryptocurrency, SIPC insurance would not cover your crypto. Put simply, there is no broader insurance system for crypto assets.

Why this is worrying news for Binance users

The SEC brought charges against Binance, Binance.US, and founder Changpeng Zhao in June. The SEC has been cracking down on many aspects of the crypto world, but its accusations against Binance are more serious than others. For example, it says Zhao and Binance misled investors and commingled customer assets.

These charges could take time to play out in court, but in the meantime, there are serious questions about whether the exchange can survive -- particularly if users can't deposit or withdraw U.S. dollars from their bank accounts. The trouble is that if the crypto giant does collapse and you have assets on Binance or Binance.US, you could lose them.

How to protect your crypto

When FTX failed, it happened so quickly that many investors (me included) didn't have time to withdraw their funds. Binance may survive, but why take the risk? There is still time to protect your assets if you act now. Here are some steps to consider.

1. Move your crypto to a wallet you control

There are several options for crypto wallets out there. But broadly speaking, you can get a hot wallet that is connected to the internet or a hard wallet (also known as a cold wallet) that is kept offline. Hard wallets are more secure. Hot wallets are more convenient. 

When you set up your wallet, you will get what's known as a seed phrase. This is like a master key -- if you lose it, you could lose access to your funds completely. There's no point in rescuing your funds from a crypto platform that's in trouble if you then lock yourself out of your wallet. 

2. Move your crypto to another exchange

There is a bit of a learning curve involved in crypto wallets. If you don't have time to get your head around them right now, consider opening an account with another top cryptocurrency exchange. You'll need a platform that lets you make crypto deposits (which some crypto brokers won't do). In terms of security, look for a reputable crypto exchange that carries out third-party audits of its reserves.

3. Get out of crypto altogether

It's been a difficult few years for crypto investors, who've seen their portfolios decimated and popular platforms self-destruct. However, don't let Binance's difficulties push you to panic sell. If you are considering selling your crypto, the real question is whether you still believe it is a good long-term investment. If you have lost faith or think there are better investments, now may be the time to cash out. But make sure you understand any tax implications before you start selling it off. 

Given that Binance.US no longer allows dollar withdrawals, you will need to move your funds to a platform that does. Pay attention to the fees as you'll need to make several transactions. First, the transfer from Binance to your new exchange. Then a conversion into U.S. dollars, and then a withdrawal. If you're losing a small percentage each time, it could prove costly.

Bottom line

This latest double news whammy is worrying. Essentially, Binance.US is reminding customers that their funds won't be protected if it fails, at a time when there is a possibility the platform could actually fail. And it can't perform a key function investors want in a crypto exchange -- depositing and withdrawing dollars. 

If you have crypto assets on Binance or Binance.US, don't wait for more bad news or regulatory action. There are safer places to store your funds.