Digital Accounts

When you deposit fiat currency (such as USD, EUR, GBP) into a digital bank account, the bank doesn’t actually keep your money in a physical vault. Instead, your deposited money becomes a part of the bank’s total reserves. The bank then uses these reserves to lend to other customers, invest, and conduct their operations.

Just like traditional banks, digital banks are often insured by a government entity. In the U.S., for example, deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per account.

Cash deposits held by Digital Accounts are placed in a network of U.S. “Prime Partner Banks” which are FDIC (Federal Deposit Insurance Corporation) members. FDIC insurance covers up to $250,000 per depositor, per FDIC-insured bank, per ownership category.

If a digital bank fails, the process to claim insurance on your deposits generally follows these steps:

Bank Failure Notification: When a bank fails, the regulating and insuring body is typically immediately involved in the process. In the U.S., this body is the Federal Deposit Insurance Corporation (FDIC). They would take control of the bank’s operations.

Account Verification: The FDIC would then verify the accounts and the amounts held in each account.

Insurance Payout: After verification, the FDIC would begin the process of returning the insured amount of money (up to $250,000 per account) to the account holders. This is often done by setting up a new account in the depositor’s name at another FDIC-insured bank.

Uninsured Deposits: If the depositor had more than the insured limit in the bank, the FDIC would provide a receivership certificate to the depositor. This certificate entitles the depositor to a share of any funds recovered through the sale of the failed bank’s assets.

The process can vary depending on the country and the specific deposit insurance scheme in place. It’s always a good idea to understand the specifics of your digital bank’s insurance scheme and the process to claim it in case of a bank failure.

If your digital bank stores assets other than fiat currency, such as cryptocurrencies, the insurance and recovery process may be different and could be more complex. It’s crucial to know the terms and conditions of such accounts before depositing assets into them.

Digital banks take a variety of measures to ensure the security of your funds, and these can include:

1. Data Encryption: This is the standard security measure taken by all digital banks. All communication between you, your device, and the bank’s servers are encrypted to prevent any interception or eavesdropping.
2. Multi-Factor Authentication (MFA): Digital banks usually implement MFA. This means that to access your account, you’ll need to provide at least two proofs of identity. This could be something you know (like a password), something you have (like your phone), or something you are (like your fingerprint).
3. Biometric Authentication: Some digital banks use biometric data, like fingerprints or face recognition, to ensure that only you can access your account.
4. Anti-Fraud Measures: Digital banks use machine learning and artificial intelligence to detect unusual behavior or transactions in your account, helping prevent fraud.
5. Secure Customer Service: To prevent social engineering attacks, customer service representatives at digital banks are trained to verify your identity before making any changes to your account.
6. Insurance: Digital banks that hold fiat currency will often insure those funds. In the U.S., for example, these funds would be insured by the FDIC up to $250,000 per depositor.
7. Regular Security Audits: Digital banks regularly undergo security audits to find and fix any potential vulnerabilities.
8. Cold Storage: For digital banks that deal with cryptocurrencies, they often use cold storage (keeping cryptocurrency offline) to secure the majority of the digital assets from potential cyber threats.
9. Regulatory Compliance: Digital banks comply with all relevant regulations and standards, which often include specific security measures that must be taken to protect customer funds.

However, no system can be 100% secure, and it is always important for individual users to take precautions such as using strong, unique passwords, keeping their devices secure, and being wary of phishing attempts.

The funds in your Coast Digital Account are insured by the Federal Deposit Insurance Corporation (FDIC) provide protection up to $250,000 per depositor, per FDIC-insured bank, per ownership category in the event of a bank failure. This insurance includes checking accounts, savings accounts, money market deposit accounts, and certificate of deposit (CD) accounts.

The custody of funds in a digital bank is handled in a manner similar to traditional banks, although the specific methods can vary based on the bank’s operating model and the types of funds involved.

Fiat Funds: When you deposit money into a digital bank account, the bank becomes the custodian of your funds. Your funds become part of the bank’s total reserves, which the bank can use to make loans and investments. However, they are obliged to return your money when you request it, up to the full amount of your deposit (minus any fees or charges that may apply). If the bank is insured, as most are, your funds are protected up to the coverage limit (for example, $250,000 in the U.S. under the FDIC).

Digital Assets (Cryptocurrencies): If your digital bank offers cryptocurrency accounts, custody of these funds can be a bit different. Due to the risks of hacking and theft, digital banks often store cryptocurrencies in ‘cold storage’ (offline storage) to keep them safe. Access to these funds is usually protected by high-security measures, including multi-signature wallets that require multiple approvals before funds can be moved.

Securities (Stocks, Bonds, Etc.): If your digital bank offers investment accounts, they generally don’t hold your securities directly. Instead, they typically partner with a custodian bank or brokerage that specializes in securely holding securities. These are often large, well-established institutions that are regulated by financial authorities.

In all cases, digital banks are responsible for keeping your funds secure and accessible to you. They are also generally subject to regulations designed to protect consumers and ensure the stability of the financial system.

If a digital bank goes bankrupt, what happens to your funds depends on several factors, such as the regulatory framework of the country where the bank is registered, the bank’s insurance policies, and the types of funds you hold. Here’s a general outline of what might happen:

Fiat Funds: In many countries, if a bank goes bankrupt, deposits in fiat currency are protected by a government-run deposit insurance scheme up to a certain limit. In the U.S., this is provided by the Federal Deposit Insurance Corporation (FDIC) and covers up to $250,000 per depositor. In the EU, a similar guarantee is provided by the respective country’s deposit guarantee scheme, typically covering up to €100,000. If the funds in your account exceed the insured amount, you may lose the excess unless the bank’s assets in bankruptcy proceedings are enough to cover the remaining amount.

Cryptocurrency: Cryptocurrency holdings are usually not protected by government-run insurance schemes like the FDIC or the EU’s deposit guarantee schemes. If a digital bank that holds cryptocurrency goes bankrupt, the specific outcome would depend on the bank’s policies, whether the funds are held in trust, and the results of bankruptcy proceedings. Some digital banks or financial technology companies may have private insurance for digital assets, but this varies significantly by institution.

Securities: If your digital bank provides an investment platform and holds securities on your behalf, these are typically held in custody by a separate regulated entity and are not part of the bank’s balance sheet. This means they are usually not at risk if the bank goes bankrupt, although the process of transferring them to another provider could take time.

Yes, typically insurance and protections for digital bank accounts do cover instances of unauthorized transactions, fraud, and theft, but the specifics can depend on the bank’s policies and the regulations in your country.

In the U.S., for instance, federal regulations require banks to provide a certain level of protection against fraudulent electronic transfers under Regulation E. If you report an unauthorized transaction within a certain period of time (usually 60 days after the statement containing the fraudulent charge is sent to you), you could be liable for $50 at most, and many banks waive this fee. If you take longer to report the fraudulent activity, your liability could increase. 

In terms of deposit insurance like the FDIC in the U.S. or similar entities in other countries, this type of insurance primarily protects your deposits in the event that the bank itself fails, not against individual instances of fraud or theft.

Checking whether your digital bank’s insurance and custody practices are up to standard involves several steps: 

1. Understand the Regulatory Framework: First, make sure the digital bank is operating under a recognized regulatory framework. For instance, in the U.S., it should be regulated by agencies such as the Office of the Comptroller of the Currency (OCC) or state banking authorities, and in Europe, by the relevant national financial regulator.
2. Check Deposit Insurance: Look for information about deposit insurance. In the U.S., banks should have Federal Deposit Insurance Corporation (FDIC) coverage for fiat deposits. European banks should have a similar guarantee from their respective national deposit guarantee schemes.
3. Review Terms and Conditions: Carefully read the bank’s terms and conditions, which should explain how your funds are stored and protected. Look for details on their security measures and whether they have additional insurance to cover potential losses.
4. Audit Reports: Some digital banks and financial institutions conduct regular audits and may provide these audit reports to the public, often on their website. These reports can give you an understanding of their security measures, risk management, and operational effectiveness.
5. Research the Bank: Look for reviews or news about the bank. Negative reviews, frequent complaints about security, or news of past security incidents could be red flags.
6. Customer Service: Don’t hesitate to contact the bank’s customer service if you have any questions about their insurance and custody practices.