BaFin Clarifies Crypto Investments Are Not Protected by Deposit Insurance

The German financial market supervisor, the Federal Financial Supervisory Authority (BaFin) clarified on Monday that deposit insurance protection in the mainstream financial industry does not cover losses with cryptocurrencies.

“BaFin now points out that crypto-assets do not fall under the protection of deposit insurance and, as a rule, the protection of investor compensation does not apply either,” the latest warning stated (translated from German).

In addition, the agency pointed out that existing insolvency laws in the country and the collapsed crypto company’s agreement with customers will determine the recovery of customers.

“The position of the customer is based on insolvency law, and, therefore, depends on whether there is a right of segregation after the design and implementation of the contractual relationship between the custodian and the customer,” the agency added.

Under the European Union law, customer deposits in the banks are protected by up to €100,000, which is a safety net that is not available to crypto companies.

The latest clarification came as an amendment to the existing warning of BaFin against crypto investments, which the regulator issued last February. Then, the German market supervisor termed crypto investments very risky.

Crypto Companies Going Under

The amendment and clarification came when the cryptocurrency industry is witnessing several abrupt bankruptcy filings. Celsius, Voyager Digital and a few others became insolvent. However, the normal recovery process for the customers is time-consuming: Mt. Gox creditors still did not receive their claims.

Meanwhile, several crypto companies made claims of being protected by the mainstream deposit protection schemes prompting regulators to debunk the misleading statements.

The US FDIC first warned Voyager Digital for falsely claiming customers to be protected by the US government and then send notices to a few other platforms, including the US arm of FTX, for similar statements.