It's Thanksgiving weekend in the United States, which kicks off a
holiday season in which Americans eat Turkey and watch
films about bank runs. These are American traditions.
In keeping with this tradition, CNBC reported last week that
thousands of Americans have seen their savings vanish with the
collapse of a financial tech company called Synapse.
The article gives the example of a school teacher who deposited
the proceeds of her home sale, so basically her life savings,
into an influencer promoted bank called Yada.
She first found herself locked out of that account.
This went on for over six months and last week she learned that
she would only be getting $500.00 of her $280,000 back
from Yada. That is .18% of her savings that
they're returning to her. She is, of course, not the only
victim. According to a court appointed
trustee, up to $96 million of customer funds have vanished
entirely at Yatta, which was a fintech, not a bank, despite
being promoted as a bank by a number of big Youtubers.
Almost 14,000 customers report that they're being offered a
combined $11.8 million despite having deposited almost $65
million. It's not clear how this money is
being divided up, as some customers, like the school
teacher I mentioned earlier, are doing a lot worse than others.
Yatta is a particularly strange example of a fintech, where it
was originally launched as offering Prizelink savings
accounts, which are savings accounts in which the depositor
receives a low interest rate but then has the chance of winning a
large amount of money in a sweepstakes.
The New York Times described Yatta a year ago as a smart way
to turn gambling into a virtue. Andreessen Horowitz, a large
Silicon Valley VC firm, explained in their blog that
fintechs like Yada differentiate themselves by appealing to the
aspirations and product demands of Gen.
Z, which I guess is gambling and saving in a non FDIC insured
bank account. And This is why Gen.
Z are so hard to understand. Yatta originally offered
depositors an interest rate of 0.2%, with the chance of winning
up to $10 million, a price they later revised down to $1
million. It doesn't appear that the top
prize was ever won, and Coffeezilla reported on his
YouTube channel a few months ago that Yatta pivoted from this
sort of gamified savings model into what was basically an
online casino, which they describe for legal reasons as an
online sweepstakes model. Yotta itself has not declared
bankruptcy, but due to the bankruptcy of Synapse, a fintech
company had relied on its customers lost access to their
funds. According to CNBC, Yotta and
other fintechs in this online saving space advertised that
their deposits were FDIC insured.
CNBC say that a contract that customers received from Synapse
after signing up for checking accounts stated that user money
was insured by the FDIC for up to $250,000.
The FDIC, in contrast, has been very clear that it's insurance
fund does not cover the failure of fintechs or other non banks,
and they've said that should such a firm fail, there's
nothing they can do. The Treasury Department actually
saw this problem coming and issued a report two years ago to
the White House Competition Council about the entry of non
banks into the consumer banking space.
The report argued that while neo banks succeeded in increasing
competition for deposits with potential consumer benefits,
there was one problem. These firms are generally not
subject to the same oversight for safety and soundness or for
consumer protection. The report said that the
fintechs avoided becoming banks, which is expensive and brings on
regulatory burdens, instead choosing to partner with banks
so that they both compete with and work with banks, creating
regulatory gaps. Those very regulatory gaps are
the reason that all of this money can't seem to be traced.
And one of the VCs who funded Synapse, the fintech that
collapsed, has been in the press this week saying that certain
financial regulators need to be shut down as they are slowing
down his innovative business practices.
In a recent episode of the Joe Rogan Experience, Marc
Andreessen, the Co founder of the VC firm Andreessen Horowitz,
took shots at the Consumer Financial Protection Bureau.
I'll let the always well spoken Marc Andreessen explain the
issue himself. Umm.
So, for example, with this thing called the Consumer Finance
Protection Bureau, CFPB, which was the it's sort of Elizabeth
Warren's personal agency that she gets to control, and it's an
independent agency that just gets to run and do whatever.
It wants What does her agency do?
Whatever she wants. What does it do though?
We basically terrorize, terrorize financial
institutions, prevent fintech, prevent new competition, new
startups that want to compete with the big banks.
Oh yeah, How so? Just like terrorizing anybody
who tries to do anything new in financial services.
And can you give me an example? You know, de banking, this is
where a lot of the de banking comes from is the is these
agencies. So de banking is when you're you
as either a person or your company are literally kicked out
of the banking system. Like they did to Kanye.
Exactly like they did to Kanye. My, my, my partner, Ben's father
has been debanked. Really.
We had an employee who for what? We for having the wrong politics
for for saying unacceptable things Under current banking
regulations. Under OK, here's a great here's
a great thing. Under current banking
regulations, after all the reforms of the last 20 years,
there's now a category called a politically exposed person Pep.
And if you are a PEP, you are required by financial regulators
to kick them off of your to kick them out of your bank.
Why you're not allowed? What if you're politically on
the left? That's fine.
No, because they're because they're not politically.
Exposed, so no one on the left gets debanked.
I have not heard of a single instance of anyone in the left
getting can. You tell me.
Now, we might need to Fact Check some of what Mark just said.
While the CFPB was originally proposed by Elizabeth Warren in
2007, she was removed from consideration as its director by
the Obama administration and has never headed it up.
Its current director is Rohit Chopra, and I don't know if Mark
struggles with face blindness or something like that, but it's
not easy to mix the two of them up.
Rohit is a 42 year old man of Indian descent and Elizabeth is
a 75 year old woman of well, it doesn't matter.
It's hard to mix them up is what I'm really trying to say now.
The audio seems to be a bit off in this section.
What does it do though? We basically terrorized
financial terrorized financial institutions.
Prevent fintech. Prevent new competition, new
startups that want to compete with the big banks.
But I think what Mark is saying, and I may be wrong, is that the
CFPB supervises banks, thrifts and credit unions with assets of
over $10 billion. Also supervising non depositary
mortgage originators and servicers, payday lenders,
consumer debt collectors, international money transfer and
private student lenders. It's in place to protect
consumers from being ripped off by financial services providers,
but it doesn't yet cover fintechs like Yatta and Sign Up.
Mark accuses the CFPB of being involved in de banking and in
particular de banking conservatives.
This is entirely untrue. In fact, they do the opposite.
They investigate banks for discriminatory treatment of
customers. He goes on to effectively change
the subject entirely to discussing politically exposed
persons. And while that's outside the
scope of this video, I do happen to know a bit about that as I
ran a fund for many years. I'm amazed that Mark runs a
multibillion dollar fund and doesn't understand these rules.
Politically exposed persons are people like politicians, their
families, and their close business associates.
If a politically exposed person, let's say someone like Hunter
Biden, wants to move a large sum of money into a bank or an
investment fund, the financial institution accepting those
funds is required to investigate the source of of those funds,
which usually involves asking the customer where the money
came from. If they say it came from selling
their house or liquidating another investment, you then
have to ask them for documents proving this.
This can be a bit awkward and embarrassing, as your customer
often feels accused of wrongdoing, but most people in
this position are used to these procedures, which are in place
to prevent politicians from taking bribes or having bribes
passed to their family members or business associates on their
behalf. If Elizabeth Warren wanted to
invest $1,000,000 in an index fund, she would likely receive
this sort of scrutiny. She would have to explain the
source of the funds. Now in today's day and age, if a
politically exposed person wanted to put money in your fund
and said that the money came from crypto gains, there's a
good chance that you'd be unable to take that money as crypto is
widely used in money laundering. A lot of crypto people get upset
when you say this, but financial institutions can get in a lot of
trouble if they touch dirty money.
So crypto gains or gambling wins will lead to even more scrutiny
until a financial institution can be sure that the money was
earned. Honestly, when Chase closed
Kanye West's bank account a few years ago, who I believe prefers
to be called Yee, this was no different to a restaurant or any
other private business refusing to serve a customer.
It's constitutionally protected. Now, I'm going to take Mark at
his word that he wants to have the CFPB shut down because of
this DE banking issue that he possibly misunderstands.
But Mark unfortunately missed this press release on the CFPB
website that came out about a week before his Joe Rogan
interview about how they're going to crack down on illegal
DE banking, which I'm sure he would have been delighted about.
Oh, and there's there's another bit in there about how they plan
to supervise the largest fintech companies.
Now, maybe Mark's firm doesn't invest in fintech firms and he
didn't hear about this new development a week before he was
on Joe Rogan's podcast. Let's take a look at his
website. Oh, look at that Synapse.
That's a fintech, isn't it? And there's loads of fintechs
and crypto stuff on the list. You know, the kind of stuff that
American consumers might need to be protected from.
They should probably remove sign ups from their list of
investments though, because it did go bankrupt.
How would Mark not know about these investments?
It's, it's frankly, it's all over his website.
Does he not listen when he's sitting in the meetings?
Here's a blog post on his company website from 2021 about
fintech cozying up to the creator economy.
Oh look, a video link. Oh come on Mark, the Youtubers
know how to cover their tracks and you're leaving everything up
on your website. Come on.
OK, so let's back up a bit. What?
What exactly is fintech anyhow? Well, the word is just a
combination of the words financial and technology, and
it's used to describe the use of technology to deliver financial
services and products to customers.
And it can apply to areas of banking, insurance, investing,
or anything that relates to finance.
Examples range from peer-to-peer payment services like Venmo and
Zell, to robo advisors to stock or crypto trading apps like
Robin Hood, to app based insurance companies like
Lemonade. Most of them advertise online.
Pick a narrow area of finance like taking deposits or making
short term loans and try to do it cheaper than a bank would,
often by automating customer service and by not needing any
physical branch locations. Synapse was a fintech company
that connected other fintech companies like Yatta to banks.
When you deposited money at Yatta, it was passed to Synapse
who deposited it in a bank which held the money and was FDIC
insured. What Synapse did was keep track
of whose money was where. Yatta just needed to design A
gamified front end that people liked using and organised the
sweepstake. Synapse kept the records and a
bank held the money. Some of the fintechs like Yada
promised enhanced FDIC insurance of up to $500,000 on their
websites, explaining that the funds would be deposited across
a network of FDIC insured banks. Synapse described themselves as
a banking as a service provider where they provided the back end
software for around 100 different fintech companies who
had millions of customers and they deposited the money at four
different partner banks. The fintechs and the banks all
relied on Synapse to track transactions and account
balances and determine how much money was in each customer
account at all times. Rather than licensing their
software, sign ups struck deals with both the banks and the
fintech apps. They handled customer
onboarding, KYC and anti money laundering checks, record
keeping, risk management and all other compliance functions.
Sign ups created 4 benefit of accounts at the four partner
banks they dealt with, where the fintech customer's money was
deposited into interest bearing pooled accounts.
Synapse, being a tech firm and not a bank, was mostly free of
regulatory oversight. In April, Synapse filed for what
can only be described as a chaotic bankruptcy, where the
banks quickly lost access to all customer and transaction data
that was being maintained by Synapse and found themselves
unable to work out whose money was whose.
The accounts were all frozen until that could be worked out.
The problem seems to be that there's no good record, or at
least no good, easily accessible record of whose money is whose.
And the various companies involved are all accusing each
other of wrongdoing, as Marc Andreessen would say.
Decrypt fintech. Prevent Decrypt Fintech.
According to the most recent Bankruptcy Trustees report dated
November 13th, the four partner banks had $219,000,000 in
deposits from sign ups, and $187 million of that money has been
dispersed to customers so far. So why isn't the FDIC insurance
kicking in then? Well, none of these apps are
banks, and for this reason they are not covered by FDIC
insurance. The partner banks are FDIC
insured. But the banks didn't fail, the
fintechs did. And the way they failed is not
by investing the money and losing it, but by losing track
of who the money belongs to. And that seems to be where we
are today. Regulators have mostly been
sidelined in this situation and this is because of the regular
gaps that the Treasury warned about in its report to the White
House Competition Council two years ago.
Banks are required to show that they are keeping good records as
obviously this is an important part of what banks do.
But the bank's records just show that the accounts belong to
fintechs and the Synapse failure seems to mean that all detail
beyond that is lost. The fintechs in question all
worked with banks who keep deposits of less than 10 billion
dollars, and if you remember, that means that they are not
overseen by the Consumer Financial Protection Bureau.
The FDIC has no role in the situation either, as no banks
have failed, nor are they failing.
At a hearing In June, a letter from the Federal Reserve was
read out to the court stating that the Fed does not supervise
or regulate fintech companies, nor does it mediate or have the
authority to mediate disputes among commercial entities.
It is expensive and time consuming to deal with
regulators, and fintech companies are all about moving
quickly and keeping costs low. One of the ways of doing this is
to structure your business model such that it works around
existing regulation, which is what happened here.
And customers love this lower price until it all goes wrong.
The bankruptcy trustee, Gillenna McWilliams, who was previously
the chair of the FDIC, writes in her report that the estate of
Synapse does not have the funds to implement an independent
reconciliation, nor any remaining operations or
employees to participate in these efforts.
So in plain English, Synapse, who built the technology to know
whose money is whose, has run out of money and no longer has
any employees who can figure it out?
Well, where have they all gone then?
Well, Sankat Patak, the founder and CEO of Sign Ups, announced
in August that he had raised $11 million in VC funding for a new
robotic startup called Foundation.
In his Twitter video, he said that he had been working on the
start up for three months, so basically since the date of the
bankruptcy announcement. And his goal is to automate GDP
through AI and robotics to free people from labour jobs,
allowing them to pursue their passions.
He explains the declining birth rates will lead to severe labour
shortages in 20 to 30 years, risking civilizational collapse,
making this mission very urgent. So yeah, I get it that some
people are worried about having lost their life savings, but
Sankat is battling civilizational collapse through
AI robots, which is a noble cause indeed.
His near term goal, according to his Twitter feed, is to have a
walking humanoid robot by year end, which will be quite a
breakthrough. If he needs one quickly.
I'd buy that Honda one that was running around and kicking a
football about 10 years ago. If there's one lesson that
SANCAT should have learned from Synapse, it's that you don't
always have to reinvent the wheel.
It's not all that clear how this situation will resolve.
The bankruptcy trustee has told the court that there's as much
as a $95 million shortfall, and the judge has said that he
suspects that 10s of millions of dollars will never be found.
He goes on to say this is a very, very unusual situation.
Rob Copeland, who I interviewed on this channel a few months
ago, wrote an article in the New York Times saying that it's not
always easy to know if your online bank is actually a bank.
He says that start-ups frequently describe themselves
using permutations of the word bank, even if they aren't 1.
He points out that on its website, Chime describes itself
as banking with no monthly fees. And the fine print then reads,
Chime is a financial technology company, not a bank.
The lender Albert, he says, uses the slogan The Simple Way to
Bank, but then adds in the fine print.
Albert is not a bank. Rob advises that you read the
fine print and if you're still unsure, he recommends emailing
customer service as a written record is always valuable.
He says that you should ask where your money is being held
and what other companies are involved.
He says that any company that can't provide a straightforward
answer may actually be giving you the answer you need.
Now look, I'd love to stick around and tell you more about
this situation, but over the last few minutes I've grown
increasingly concerned about civilizational collapse.
And so I need to go and get to work right away on building an
AI powered robot, and I suggest that you do the same.
Thanks for tuning into this week's podcast.
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Patreon or just e-mail a link to a friend to help the podcast
grow. Have a great week and talk to
you again soon. Bye.