Synapse, a new financial technology (Fintech) company, declared bankruptcy earlier this month, affecting hundreds of financial technology companies and hundreds of thousands of users. On the one hand, it was discovered that there was a funding gap of nearly US$100 million with the partner bank Evolve. On the other hand, user funds that claimed to be insured by the Federal Deposit Insurance Corporation (FDIC) were also rebutted and claimed that they were not covered by the insurance. Today, the bankruptcy liquidation proceedings are in a stalemate.
Factsheet: What is Synapse?
Founded in 2019, Synapse provides Banking as a Service (BaaS) including instant payments, credit cards and consumer cards, allowing thousands of new companies to embed the banking services provided by Synapse into their products; at the same time, he is also the Financial intermediary service provider between banks and technology companies.
Synapse official website
As a high-profile Fintech company, Synapse also received $33 million in Series B financing in 2019, led by A16z.
However, with the economic downturn, Synapse fell into trouble in 2023 and filed for liquidation under the U.S. Bankruptcy Code in April this year. As a result, thousands of companies and their users who cooperated with it are facing financial difficulties due to Synapse's collapse. question.
Are fintech accounts that claim to be “FDIC insured” really safe?
Of course, as seen with Synapse's collapse, this isn't necessarily safe; however, there are many details that still need to be clarified:
Cut from Yotta Savings
In 2019, as a financial technology application that provides cash rewards, savings interest and financial cards through a unique lottery incentive system, Yotta Savings is widely loved by American families and claims that user funds will be protected by the Federal Deposit Insurance Corporation ( FDIC ) Insured.
Yotta Savings official website
However, everything collapsed after Synapse faced bankruptcy. It is said that about 200,000 financial technology application users were not listed as FDIC insured accounts; among them, Yotta, as the largest affected household, accounted for about 85,000 and was unable to withdraw funds. The total funding received reached US$112 million.
Yotta founder Adam Moelis revealed in an interview with CNBC:
We never thought we would be in a situation like this, where we have worked with banks that are members of the FDIC, and yet no regulator has stepped in to help us.
Former FDIC Chairman Jelena McWilliams, who was appointed bankruptcy trustee in the Synapse case, said:
A shortfall of $65 million to $96 million between Synapse's accounts and banks was not just an omission of financial information, but may have been lost before the bankruptcy filing.
FDIC: This is not within the scope of our work
As the FDIC issued an official announcement, the situation may be worse than people think:
FDIC deposit insurance does not protect against the failure of non-bank companies such as Synapse. In this case, the consumer may be able to recover some or all of their money through bankruptcy proceedings handled by the courts, but this may take some time.
In other words, "This is not within the FDIC's jurisdiction."
U.S. Bankruptcy Court Judge Martin Barash, who is presiding over the Synapse case, was shocked by the above-mentioned regulatory gray area and said that priority will be given to returning funds to ordinary people, but his authority is limited:
I believe users still feel they are protected from this disaster. However, the situation is quite serious and users are in crisis.
Clarifying FDIC Insurance Standards
The FDIC, an insurance company established by the U.S. federal government, insures deposits held in insured banks and savings associations up to $250,000 per depositor's general account at each bank.
However, a closer look at what FDIC insurance covers reveals the following key points:
The bank that the deposit application cooperates with or the user's own deposit bank "needs to be a member of the FDIC." However, traders involved in cryptocurrency and non-bank financial technology companies themselves are not covered by this insurance.
Only depository products are covered, such as general deposit accounts or money market deposit accounts, while stocks, bonds and crypto-assets are not covered.
In addition, FDIC insurance specifically applicable to users of financial technology companies or other intermediaries is mostly "pass-through insurance" through bank accounts. User deposits will be directly deposited in banks protected by FDIC insurance, and Open an account in the bank as a "Beneficiary (FBO)".
In this way, if a fintech company unfortunately fails, but they have clear account records, users can usually get their insurance money back quickly. On the contrary, if the relevant information and records are not detailed and complete enough, users may not be able to withdraw their funds immediately.
(Are your investments covered by FDIC deposit protection? The New York State Department of Financial Services is rumored to be investigating Gemini)
Regulatory gray area
It is obvious that most fintech companies are currently providing bank-like services and are cooperating with small or immature banks. They do not need to register with the authorities or be strictly regulated, which may bring different levels of risks.
Paul Clark, senior counsel at Seward & Kissel in Washington, said:
Most people hold financial assets through strictly regulated institutions such as brokers or banks that specialize in this business; however, in fact, in some cases, you can also become a custodian for other people's assets without having to Any license.
He added, "There are huge gaps in the current financial structure and a serious regulatory loophole."
Last June, the U.S. Consumer Financial Protection Bureau (CFPB) also warned that any deposits or assets on mobile payment apps may not be covered by FDIC insurance.
(U.S. regulators: Money in mobile payments is not protected by the FDIC, whether it is fiat currency or crypto assets)
Conclusion: Be careful when choosing financial technology services
Even if fintech companies can indeed drive innovation quickly, consumers and investors still need to be cautious about the following points when choosing these services:
Fintech accounts are risky: Even if a fintech company claims to be covered by FDIC insurance, in reality those protections may be incomplete, especially if a fintech intermediary such as Synapse faces bankruptcy.
Regulatory gray area: There may still be regulatory loopholes between fintech companies and banks, allowing these companies to provide bank-like services without being subject to strict supervision, thereby increasing user risks.
Limited authority of regulatory agencies: When regulatory agencies (such as the FDIC) intervene to deal with the bankruptcy of non-bank financial technology companies, their authority will be limited, which may further increase users’ financial risks.
On the other hand, fintech companies need to improve compliance and information transparency, and banks also need to more strictly monitor the partners they cooperate with.
At the same time, regulatory agencies must strengthen sound supervision and necessary enforcement of financial technology companies, and formulate clearer industry standards for the above-mentioned regulatory loopholes.
This article Is it safe to have "FDIC insurance"? An in-depth study of the collapse, hidden worries and regulatory black holes of Fintech startup Synapse first appeared on Chain News ABMedia.
