How to Lose Your Life Savings Held in an FDIC-Insured Bank Account
Telling the Story of Synapse as a Failed Shadow Bank
For 15 years, former Texas schoolteacher Kayla Morris put every dollar she could save into a home for her growing family.
When she and her husband sold the house last year, they stowed away the proceeds, $282,153.87, in what they thought of as a safe place — an account at the savings startup Yotta held at a real [FDIC-insured] bank.
…
“We were informed last Monday that Evolve [the bank] was only going to pay us $500 out of that $280,000,” Morris said during a court hearing last week, her voice wavering. “It’s just devastating.”
That’s the opening to Hugh Son’s excellent reporting on the collapse of Synapse, a “financial technology firm” (or worse, “fintech”).
What is Synapse and what do they do?
No, really, if Matt Levine doesn’t know, then nobody knows.
If no one can tell you what a a particular fintech or crypto company actually does to generate real revenue, but if Marc Andreeson is a key investor and the money seems to disappear…then maybe it was a scam to begin with?
I’m not saying we know Synapse was a scam; after all, we still don’t know very much at all about its actual collapse. Yet saying that “it was scam” proves far superior as an operational assumption than, say, it was “the AWS of banking.”
We do know the following: Synapse was a fintech whose job was to act as an intermediary between other fintechs and real banks. Synapse’s sole function as a secondary fintech was to allow the primary fintechs – companies like Yotta – to be shadow banks.
As we’ve discussed around here before (in the footnotes, of course) a shadow bank is an institution that takes deposits like a bank, but doesn’t have a bank charter. It’s great to be a bank because you get to make money out of money; it’s much better to be a shadow bank because you make money out of money without a regulator looking over your shoulder to make sure the money is there.1
Yotta is absolutely not a bank. They therefore cannot legally take bank deposits, and they most certainly cannot claim to be supported directly by FDIC insurance. Had they wanted to, Yotta could have followed the playbook from a variety of other shadow banks: like Schwab, they could have taken in deposits and issued mutual fund shares; like Tether, they could have taken in deposits and issued a (centralized!) blockchain token. But the first option requires getting registered with the SEC (and being regulated by them) because mutual fund shares are securities. The second option requires competing with Tether, and running the risk of being shut down by the SEC who knows very well that tether tokens are securities, but just hasn’t yet figured out how to navigate the politics and the court system so as to do what must be done – shut them down.
Navigating this terrain of money/power, Yotta chose a third option: just hand the money over to a real bank. In one blow this allows them to avoid regulation and advertise FDIC insurance at the same time. Yotta’s claim was not to be a bank, but to be an innovative and disruptive fintech: they would take your money and promise you interest,2 but your money itself would be safe because Yotta would place it in accounts at real, FDIC-insured banks. It should be obvious by now that what Yotta was actually doing with your money utterly belied their claims to be a radical startup transforming the sector.
But that’s not even the worst of it, as Yotta was, for reasons that escape me, incapable of doing the above on their own. They needed a second fintech to actually place the money with proper banks.
And that’s where Synapse enters the picture: Synapse was the secondary fintech who stood between the Yotta’s of the world (would-be shadow banks) and the actual banks. Yotta handed over their depositors’ money to Synapse, who then placed the money at a variety of FDIC-insured banks. At this point you can probably already see the slow-motion car crash in the making. But let me describe its unfolding.
The real banks, like Evolve, held deposit accounts on behalf of Synapse. The banks had no direct relationship with Yotta, and certainly not with Yotta’s customers. From the bank’s perspective, their creditor was Synapse (the depositor of the cash).
Yotta had no direct relationship with the real banks. Their debtor was Synapse, the institution to which they transferred their customers’ cash.
Only Synapse, standing between the shadow banks and the real banks, had the potential capacity to create and maintain a complete ledger, one that could trace money-claims all the way from the original creditor (the depositor) to the ultimate debtor (the chartered bank). Only Synapse could construct a database that would allow each shadow bank to see where their customers’ money was held (and each real bank to see who their initial creditors – the depositors – were).
Synapse did not create or maintain such a ledger! On purpose!
If you find yourself incredulous at this last point…you should be. But this was precisely Synapse’s supposed disruptive innovation. As laid out in careful, sober detail by an October report from Troutman Pepper Financial Services (also quoted in Levine):
Synapse essentially told the world that only it would know where the money is. This ability to segment and distribute services across multiple banks meant that keeping each partner bank in the dark about what fraction of the whole deposit base the bank held was not an accident — it was part of the strategy. (my emphasis)
Synapse’s job was to function as intermediary, typically a role that requires facility in communication and expertise in the transfer of knowledge between two other parties. Yet Synapse was designed to lack such transparency, to create a ledger (and a web portal) that the real banks could access but which intentionally did not reveal which banks held which original depositors’ money. From the above report: “the partner banks and [primary] fintechs [i.e. the shadow banks] were all reliant on Synapse to determine how much each customer was owed at all times.”
In April Synapse declared bankruptcy after what Son describes as “the exodus of several key partners.” I would describe it differently. It was a bank run.
After all, as the intermediary between the primary fintechs that take customer deposits, on the one hand, and the real banks, on the other, Synapse was itself functioning as a wholesale money market broker – a different type of shadow bank. We can easily model Synapse as shadow bank: they borrowed short from the primary shadow banks and lent short to the real banks. The “exodus” of partners was therefore nothing more or less than a depositor run on Synapse, who turned out to be (or became along the way) insolvent – hence the bankruptcy declaration.
When a real bank fails, the regulators step in and look at the books, but in Synapse’s case there is no regulator, and apparently no books either. No one seems to know how much money is missing, because only Synapse could have maintained the ledger that would tell us that number. It might be as much as $96 million. This is money missing on the asset side of the primary shadow banks’ balance sheet (it’s money owed to institutions like Yotta) and hence money that cannot be returned to the original depositors (Yotta’s customers). We know for a fact that thousands of depositors have lost money – often more than 90% of what they deposited.
Worse still, those depositors will get no help from the FDIC, because the FDIC rescues banks, and no banks failed here. Evolve and the other partner banks seem to have sound balance sheets, and no records indicate that they failed to pay Synapse what they owed them. The real banks are fine.
Instead, we have the collapse of one shadow bank (Synapse, the secondary fintech and wholesale shadow bank), and another set of shadow banks (Yotta and others) who are currently carrying on doing business as if nothing happened. In Yotta’s case there has been neither financial collapse nor sanctions, for the cruelly ironic reason that Yotta’s “depositors” have no right to withdraw their money – because Yotta not a bank or a securities dealer, or any other regulated financial institution.
Even if the FDIC or some other government agency wanted to provide support for Yotta’s customers, there’s no way of knowing who is owed what, because no one kept the ledger. As Levine puts it, there are two ways for a bank (or shadow bank) to fail: it can lose the money, or it can “lose track of the money.” In the former case, the FDIC swoops in and saves the day.
In the later case, there’s nothing to be done. One final, fantastic bit from Levine:
If the bank loses its list of who has the money, what can the FDIC do? You can go to the FDIC and say “that bank owes me $100,” but anyone can say that, whether or not it is true. The definitive list of who the bank owes money is kept by the bank. Unless it isn’t. If the bank doesn’t keep a definitive list, then nobody does.
Banks and other regulated financial services firms are heavily regulated in this regard so as to make sure that there are always accurate records of who owes what to whom. But secondary fintechs (wholesale market shadow dealers)? Not so much.
To lose the ledger is to undo the money relation so completely that it cannot be repaired.
Money is never a singular thing, but crucially, the money array includes a thing – the token. For there to be money there must be the creditor, the debtor, and the denomination – and there must also be some token of the credit/debt relation. This can be a fancy coin or note or bearer bond; or it can be nothing more than a plain written record, usually a cell in a spreadsheet. But it must be at least that. If the spreadsheet is destroyed and no one has records from which to reconstruct it, it’s not that the money is lost, it’s that the money relation is obliterated.
Here we discover the true “innovation” of Synapse as a radically disruptive fintech firm. While the scale is small compared to so many other financial collapses, the nature of this collapse proves significant: Synapse didn’t just become insolvent or illiquid, they undid the fabric of the money array. This was a nuclear destruction of money.
All of this brings us back to our starting, operational assumption. If Synapse was set up to act as a banking intermediary, but one that intentionally obfuscated the money ledger, then did it “fail” as an industry-defining startup or did it “succeed” as a scam?
Marc Andreeson seems really upset that a congressionally approved federal agency might try to regulate the shadow banks in which he invests.
Well, no, actually – that’s a lie. Assuming Yotta was offering high-yield works in stylized fashion to reveal what was happing here in the terms of money markets, but Yotta didn’t actually promise high interest rates. They guaranteed very low interest rates while linking said accounts to possible financial prizes. Essentially, opening a Yotta savings account was like giving up a reasonable interest rate in exchange for lottery tickets that might win you a huge financial prize. I am absolutely not blaming the depositors, because regulators should have shut this down before it got off the ground, but one aspect of this story that has been underplayed: it looked very much like a scam right from the start. Just go to the current Yotta website and tell me it doesn’t smell scammy.
**I was unsure how to credit the photo. I attempted to use AI, but every image-generator I tried insisted upon putting a human figure (a besuited male businessman) in the image. The prompt “delete human figure” did nothing. Hence the final image is heavily cropped and reworked by me; I guess that makes it a co-authored work?