Fintech
Synapse’s collapse is another warning about unregulated financial technology
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by Thomas P. Vartanian, Opinion Contributor 7/25/24 12:00 PM ET
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.
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).