The Viability of FDIC and SIPC in DeFi

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In the US, government-supported organizations protect most traditional finance users by providing a sort of insurance on their deposits.

Among other things, these organizations protect funds in registered Institutions from being lost through insolvency or due to bank failures.

Would a similar organization work in DeFi?

What are the FDIC and SIPC?

The FDIC

The FDIC protects deposits in banks up to certain limits. If a bank becomes insolvent, the FDIC will preserve or liquidate its assets and begin to pay back customers.

The FDIC spends much of its budget on its Supervision and Consumer Protection program.

The program is concerned with the examination of banks to assess their operating conditions, management practices and policies, and compliance with applicable laws and regulations.

It also makes sure participating American commercial and savings banks comply with consumer protection laws. About $1.1 billion was spent on that program – thus, making up 58% of its spending in 2021.

It spent $227 million on bank failure resolution and receivership management of these resolved funds. Further, It spent $316 million to manage its deposit insurance fund, and lastly, $303 million was for so-called ‘corporate general and administrative expenditures.’

That makes a total of $1.9 billion in FDIC operating expenditures. A more detailed view of their expenditures in 2021 can be found on their annual report here.

The SIPC

The SIPC protects user holdings in broker-dealers. If a broker-dealer loses your securities through insolvency, the SIPC will step in to liquidate their assets and bring legal action against anyone necessary to return as many funds as possible.

Both of these organizations function well to protect consumers against loss in traditional finance – but they’re tailored for that purpose.

Apart from being able to raise funds through charging an assessment rate, which acts like a membership fee or insurance cost for institutions, the majority of their functionality comes from the ability to liquidate assets and take legal action against responsible parties.

This may not be likely or even possible with DeFi.

Could this model work in DeFi

DeFi hacks – especially since last year – are not only more prevalent and more costly – in terms of percentage of the industry. They are also less likely to result in a return of stolen funds.

The most effective method to make up for lost funds from users in…