US watchdog warns mobile payment app users that their money may not be FDIC insured.

The Consumer Financial Protection Bureau (CFPB) of the United States has warned Americans to keep their money in an insured account, rather than on an uninsured payment app. This warning was issued in a report released on June 1. The CFPB noted that the increasing popularity and usage of nonbank peer-to-peer (P2P) payment apps, including those for crypto asset transactions, has made the risk of loss in the event of a crisis more concerning.

The report stated that public awareness of Federal Deposit Insurance Corporation (FDIC) coverage has grown since the bankruptcy of crypto platforms like FTX, Voyager and others last year, as well as this year’s banking crisis which led to the loss of hundreds of millions of customer dollars. However, billions of dollars are still being stored on payment service apps without the benefit of FDIC coverage.

The CFPB listed PayPal, Venmo, Cash App, Apple Pay, and Google Pay as examples of P2P apps that offer stored value services that closely resemble deposit accounts. Meta Pay, on the other hand, does not offer such services.

Payment service providers are incentivized to encourage customers to store funds with them because those funds can be used by the provider for investment purposes, subject to legal constraints. However, the services rarely pay interest on stored funds and are subject to the risk of those investments losing value.

Even if customer funds were held in an FDIC-insured account, the customer’s eligibility for pass-through deposit coverage is only determined after a failure has occurred. Additionally, the insurance protects against the failure of the bank, but not the payment service, which is typically regulated at the state level and not subject to federal supervision. Most state regulation was designed for money transfer, not storage.

Mobile payment services are increasingly enabling crypto asset transactions, but crypto assets are not insured. Services like PayPal and Venmo allow customers to hold crypto in their accounts, but funds that have been invested by providers are not eligible for pass-through insurance. Furthermore, customers may not know where their deposits are stored.

The report concludes with a note on the supercharging of Ethereum wallets through “account abstraction.”

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