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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