Fintech

Synapse’s collapse is another warning about unregulated financial technology

Published

6 months ago

26 July, 2024

FinCrypt Staff

Synapse's collapse is another warning about unregulated financial technology

The opinions expressed by contributors are their own and do not represent the views of The Hill

by Thomas P. Vartanian, Opinion Contributor 7/25/24 12:00 PM ET

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U.S. financial disasters often stem from overheated markets becoming too enamored with shiny new financial instruments. Report of June 6 from the bankruptcy trustee of financial technology company Synapse tells just such a story and should be seen as a warning about future financial crises caused by enthusiasm for all things tech.

Synapse launched in 2014 as a technology brokerage firm, connecting emerging fintech companies with the online products they need to offer customers the ability to buy cryptocurrency, budget, save, invest, manage money, and make payments online through slick apps. Synapse has opened 100,000 demand deposit accounts with four FDIC-insured banks, with end-user balances of 265 million dollars.

Those “depositors” of course wanted their money back when Synapse filed for bankruptcy in May, assuming it was FDIC insured. But according to the trustee’s report, about 85 million dollars disappeared somewhere in the fintech and banking ledgers. Echoing the criticisms we have heard all too often about FTX Record Keepingat least one banking partner he told the trustee that “Synapse’s proprietary accounting system is difficult to interpret without the expertise of people familiar with the system.”

Fintech and cryptocurrency advocates have been arguing for years that unregulated technology platforms can do what traditional banks and investment firms can do more efficiently and just as safely. At the same time, we’ve been told that we don’t need to worry about those developing markets because the people who put their money in them know they can lose it, and if they do, it won’t impact the rest of us or the stability of broader financial markets. Recent events and the collapse of Synapse underscore the fallacy of such reassurances and the importance of modernized oversight.

Unregulated fintech companies and cryptocurrencies have reached critical mass and become credible, if not sought-after, participants in traditional financial markets. While numbers vary, fintech companies have now been valued at more than 1 trillion dollars. There is another one 2.5 trillion dollars in cryptocurrencies represented by 10,000 different coinsas well as about 1.3 trillion dollars in synthetic cryptocurrency securities and derivatives sold by Wall Street. Blackrock and Grayscale have accumulated $42 billion under management in their Bitcoin Spot ETFs only in the six months following the The Securities and Exchange Commission approved them.

Assuming a conservative $1.5 trillion in leveraged and margin buying in these markets, the cryptocurrency industry has become a $5 trillion megastructure, with estimates that it could reach 10 trillion dollars by 2026. That would make the cryptocurrency industry about 80 percent the size of the direct mortgage market in America. Unlike cryptocurrencies, however, every mortgage loan has a home backing it.

As fintechs and cryptocurrencies have become anchored in traditional financial markets and have exploited the safety and security that comes with them, the government should have reevaluated how to manage the new and growing amounts of financial risk they are creating. But these things have not happened and are not happening today.

There is nothing wrong with the worship of technology and all the great things it can do. What fintechs and cryptocurrencies do and how they do it is not the real problem. It is the lack of oversight and lack of any control over their executives that is planting the seeds of the next disaster. FTX Sam Bankman-Fritto It has taught Congress and regulators that they shouldn’t be surprised to find shoddy business practices and executives of questionable ability or character at companies that have virtually unlimited access to clients’ funds and no one to monitor what they do.

Unfortunately, it was difficult to argue that the lesson was taken seriously.

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Synapse was a relatively small company, but a larger collapse of the fintech or cryptocurrency sector could have a disastrous impact on traditional financial markets, given the inevitable connection and integration between traditional markets and fintech. recently highlighted from Acting Comptroller of the Currency. As the non-traditional financial services industry grows in size without real oversight, the next FTX, Binance, or Synapse could be the trigger that causes a financial wave.

The ambitious goal of financial stability that Congress embraced after 2008 is totally unattainable unless all types of non-banks that solicit and accept public money are regulated more like banks. It makes no sense to over-regulate and control the people who own and operate banks but allow a parallel group of people and entities that now make up 60 percent of the financial services market to compete and capitalize on consumer trust in financial institutions, while largely avoiding the regulatory sphere that creates that trust. I can think of no better recipe for preparing for the next financial crisis than to continue on our current course.

Thomas P. Vartanian is executive director of the Financial Technology & Cybersecurity Center and the author of “200 Years of American Financial Panics” (2021) and “The Unhackable Internet” (2023).

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Fintech

US Agencies Request Information on Bank-Fintech Dealings

Published

6 months ago

30 July, 2024

FinCrypt Staff

Federal banking regulators have issued a statement reminding banks of the potential risks associated with third-party arrangements to provide bank deposit products and services.

The agencies support responsible innovation and banks that engage in these arrangements in a safe and fair manner and in compliance with applicable law. While these arrangements may offer benefits, supervisory experience has identified a number of safety and soundness, compliance, and consumer concerns with the management of these arrangements. The statement details potential risks and provides examples of effective risk management practices for these arrangements. Additionally, the statement reminds banks of existing legal requirements, guidance, and related resources and provides insights that the agencies have gained through their oversight. The statement does not establish new supervisory expectations.

Separately, the agencies requested additional information on a broad range of arrangements between banks and fintechs, including for deposit, payment, and lending products and services. The agencies are seeking input on the nature and implications of arrangements between banks and fintechs and effective risk management practices.

The agencies are considering whether to take additional steps to ensure that banks effectively manage the risks associated with these different types of arrangements.

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Fintech

What changes in financial regulation have impacted the development of financial technology?

Published

6 months ago

30 July, 2024

FinCrypt Staff

Exploring the complex landscape of global financial regulation, we gather insights from leading fintech leaders, including CEOs and finance experts. From the game-changing impact of PSD2 to the significant role of GDPR in data security, explore the four key regulatory changes that have reshaped fintech development, answering the question: “What changes in financial regulation have impacted fintech development?”

PSD2 revolutionizes access to financial technology
GDPR Improves Fintech Data Privacy
Regulatory Sandboxes Drive Fintech Innovation
GDPR Impacts Fintech Data Security

PSD2 revolutionizes access to financial technology

When it comes to regulatory impact on fintech development, nothing comes close to PSD2. This EU regulation has created a new level playing field for market players of all sizes, from fintech startups to established banks. It has had a ripple effect on other markets around the world, inspiring similar regulatory frameworks and driving global innovation in fintech.

The Payment Services Directive (PSD2), the EU law in force since 2018, has revolutionized the fintech industry by requiring banks to provide third-party payment providers (TPPs) with access to payment services and customer account information via open APIs. This has democratized access to financial data, fostering the development of personalized financial instruments and seamless payment solutions. Advanced security measures such as Strong Customer Authentication (SCA) have increased consumer trust, pushing both fintech companies and traditional banks to innovate and collaborate more effectively, resulting in a dynamic and consumer-friendly financial ecosystem.

The impact of PSD2 has extended beyond the EU, inspiring similar regulations around the world. Countries such as the UK, Australia and Canada have launched their own open banking initiatives, spurred by the benefits seen in the EU. PSD2 has highlighted the benefits of open banking, also prompting US financial institutions and fintech companies to explore similar initiatives voluntarily.

This has led to a global wave of fintech innovation, with financial institutions and fintech companies offering more integrated, personalized and secure services. The EU’s leadership in open banking through PSD2 has set a global standard, promoting regulatory harmonization and fostering an interconnected and innovative global financial ecosystem.

Looking ahead, the EU’s PSD3 proposals and Financial Data Access (FIDA) regulations promise to further advance open banking. PSD3 aims to refine and build on PSD2, with a focus on improving transaction security, fraud prevention, and integration between banks and TPPs. FIDA will expand data sharing beyond payment accounts to include areas such as insurance and investments, paving the way for more comprehensive financial products and services.

These developments are set to further enhance connectivity, efficiency and innovation in financial services, cementing open banking as a key component of the global financial infrastructure.

Sebastian Malczyk

General Manager, Technology and Product Consultant Fintech, Insurtech, Miquido

GDPR Improves Fintech Data Privacy

Privacy and data protection have been taken to another level by the General Data Protection Regulation (GDPR), forcing fintech companies to tighten their data management. In compliance with the GDPR, organizations must ensure that personal data is processed fairly, transparently, and securely.

This has led to increased innovation in fintech towards technologies such as encryption and anonymization for data protection. GDPR was described as a top priority in the data protection strategies of 92% of US-based companies surveyed by PwC.

Arid Islam

Financial Expert, Sterlinx Global

Regulatory Sandboxes Drive Fintech Innovation

Since the UK’s Financial Conduct Authority (FCA) pioneered sandbox regulatory frameworks in 2016 to enable fintech startups to explore new products and services, similar frameworks have been introduced in other countries.

This has reduced the “crippling effect on innovation” caused by a “one size fits all” regulatory approach, which would also require machines to be built to complete regulatory compliance before any testing. Successful applications within sandboxes give regulators the confidence to move forward and address gaps in laws, regulations, or supervisory approaches. This has led to widespread adoption of new technologies and business models and helped channel private sector dynamism, while keeping consumers protected and imposing appropriate regulatory requirements.

George Blandford

Co-founder, UK Linkology

GDPR Impacts Fintech Data Security

A big change in financial regulations that has had a real impact on fintech is the 2018 EU General Data Protection Regulation (GDPR). I have seen how GDPR has pushed us to focus more on user privacy and data security.

GDPR means we have to handle personal data much more carefully. At Leverage, we have had to step up our game to meet these new rules. We have improved our data encryption and started doing regular security audits. It was a little tricky at first, but it has made our systems much more secure.

For example, we’ve added features that give users more control over their data, like simple consent tools and clear privacy notices. These changes have helped us comply with GDPR and made our customers feel more confident in how we handle their information.

I believe that GDPR has made fintech companies, including us at Leverage, more transparent and secure. It has helped build trust with our users, showing them that we take data protection seriously.

Dr. Rhett Stubbendeck

CEO & Co-Founder, Leverage Planning

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Fintech

M2P Fintech About to Raise $80M

Published

6 months ago

30 July, 2024

FinCrypt Staff

Application Programming Interface (API) Infrastructure Platform M2P Financial Technology has reached the final round to raise $80 million, at a valuation of $900 million.

Specifically, M2P Fintech, formerly known as Yap, is closing a new funding round involving new and existing investors, according to entrackr.com. The India-based company, which last raised funding two and a half years ago, previously secured $56 million in a round led by Insight Partners, earning a post-money valuation of $650 million.

A source indicated that M2P Fintech is ready to raise $80 million in this new funding round, led by a new investor. Existing backers, including Insight Partners, are also expected to participate. The new funding is expected to go toward enhancing the company’s technology infrastructure and driving growth in domestic and international markets.

What does M2P Fintech do?

M2P Fintech’s API platform enables businesses to provide branded financial services through partnerships with fintech companies while maintaining regulatory compliance. In addition to its operations in India, the company is active in Nepal, UAE, Australia, New Zealand, Philippines, Bahrain, Egypt, and many other countries.

Another source revealed that M2P Fintech’s valuation in this funding round is expected to be between USD 880 million and USD 900 million (post-money). The company has reportedly received a term sheet and the deal is expected to be publicly announced soon. The Tiger Global-backed company has acquired six companies to date, including Goals101, Syntizen, and BSG ITSOFT, to enhance its service offerings.

According to TheKredible, Beenext is the company’s largest shareholder with over 13% ownership, while the co-founders collectively own 34% of the company. Although M2P Fintech has yet to release its FY24 financials, it has reported a significant increase in operating revenue. However, this growth has also been accompanied by a substantial increase in losses.

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Fintech

Scottish financial technology firm Aveni secures £11m to expand AI offering

Published

6 months ago

30 July, 2024

FinCrypt Staff

Aveni, Investment Management, AI, NLP, UK

By Gloria Methri

Today

To come
Aveni Assistance
Aveni Detection

Artificial intelligence Financial Technology Aveni has announced one of the largest Series A investments in a Scottish company this year, amounting to £11 million. The investment is led by Puma Private Equity with participation from Par Equity, Lloyds Banking Group and Nationwide.

Aveni combines AI expertise with extensive financial services experience to create large language models (LLMs) and AI products designed specifically for the financial services industry. It is trusted by some of the UK’s leading financial services firms. It has seen significant business growth over the past two years through its conformity and productivity solutions, Aveni Detect and Aveni Assist.

This investment will enable Aveni to build on the success of its existing products, further consolidate its presence in the sector and introduce advanced technologies through FinLLM, a large-scale language model specifically for financial services.

FinLLM is being developed in partnership with new investors Lloyds Banking Group and Nationwide. It is a large, industry-aligned language model that aims to set the standard for transparent, responsible and ethical adoption of generative AI in UK financial services.

Following the investment, the team developing the FinLLM will be based at the Edinburgh Futures Institute, in a state-of-the-art facility.

Joseph Twigg, CEO of Aveniexplained, “The financial services industry doesn’t need AI models that can quote Shakespeare; it needs AI models that deliver transparency, trust, and most importantly, fairness. The way to achieve this is to develop small, highly tuned language models, trained on financial services data, and reviewed by financial services experts for specific financial services use cases. Generative AI is the most significant technological evolution of our generation, and we are in the early stages of adoption. This represents a significant opportunity for Aveni and our partners. The goal with FinLLM is to set a new standard for the controlled, responsible, and ethical adoption of generative AI, outperforming all other generic models in our select financial services use cases.”