Financial crises in the United States often result from an overheated market driven by excitement over new financial products. June 6th Report This statement from the bankruptcy trustee of financial technology company Synapse tells just such a story and should be taken as a warning against future financial crises caused by all manner of tech crazes.
Synapse was founded in 2014 as a technology brokerage, connecting emerging fintech companies with the online products their customers need to buy crypto, budget, save, invest, manage their cash, and make payments online through a fancy app. Synapse has opened 100,000 checking accounts across four FDIC-insured banks, with end-user balances totaling 1.2 trillion yen. $265 million.
Naturally, these “depositors” have synapses Filed for bankruptcy Assuming it was insured by the FDIC in May, however, the trustee’s report said. $85 million It has disappeared somewhere between fintech and bank books. FTX ArchivesAt least one banking partner I told the trustee “Synapse’s proprietary ledger system is difficult to interpret without expert knowledge of the system.”
Fintech and crypto proponents have long argued that unregulated technology platforms can do the same things that traditional banks and investment firms can do, but more efficiently and securely. At the same time, we’ve been told that we don’t need to worry about these developing markets because the people who put their money there know they can lose it, and if they do, it won’t affect other people or the stability of the financial markets as a whole. Recent events and the collapse of Synapse highlight the fallacy of these assurances and the importance of modernized oversight.
Unregulated fintech companies and cryptocurrencies have reached a critical mass and become trusted, if not wanted, participants in traditional financial markets. Figures vary, but the total market capitalization of fintech companies today is $1 trillionThere is another… $2.5 trillion In cryptocurrency, 10,000 types of coinsand about $1.3 trillion The price of synthetic and derived crypto securities sold on Wall Street is expected to rise as BlackRock and Grayscale $42 billion in assets under management Bitcoin Spot ETF in Just 6 Months SEC approved.
Assuming a conservative $1.5 trillion in leverage and credit purchases in these markets, the cryptocurrency industry would be a $5 trillion megastructure, with estimates of $10 trillion By 2026, the cryptocurrency industry will account for roughly 80% of the US direct mortgage market. But unlike cryptocurrencies, all mortgages are secured by a home.
Because fintech and cryptocurrencies are rooted in traditional financial markets and piggyback off the safety and security that comes with them, governments should have reassessed how to manage the increasing number of new financial risks they create, but this has not been done and is not happening now.
There is nothing wrong with the worship of technology and the great things it can do. It doesn’t really matter what fintech or cryptocurrency does or how it does it. It’s the lack of oversight and lack of executive vetting that is sowing the seeds of the next disaster. Sam Bankman Freed It taught Congress and regulators that when a company has virtually unlimited access to client funds and no one monitors its actions, it should not be surprising to find sloppy corporate practices and executives of questionable competence and character.
Unfortunately, it is difficult to argue that this lesson is being taken seriously.
While Synapse was a relatively small company, given the inevitable alignment and integration between traditional and fintech markets, the collapse of larger fintechs or cryptocurrencies could have disastrous effects on traditional financial markets. Recently in the spotlight By the Acting Comptroller of the Currency. As the non-traditional financial services industry grows in size without substantial oversight, the next FTX, Binance, or Synapse could be the trigger that unleashes a financial tsunami.
The lofty goal of financial stability that Congress set after 2008 will be simply unattainable unless all non-banks that solicit and accept the public’s money are regulated like banks. It makes no sense to over-regulate and vet the people who own and run banks while tolerating the same kind of people and entities that currently make up banks. 60 percent of the financial services market They compete by exploiting consumer trust in financial institutions, and largely avoiding the scope of the regulations that create that trust. It is hard to imagine a better way to spark the next financial crisis than by continuing on the current course.
Thomas P. Vartanian is executive director of the Center for Financial Technology & Cybersecurity and author of “200 Years of American Financial Panics” (2021) and “The Unhackable Internet” (2023).
