As the size of the non-traditional financial services industry grows with no real oversight, the next FTX, Binance or Synapse may be the trigger that causes a financial tidal wave.
U.S. financial disasters often emerge from overheated markets that become far too enamored with shiny new financial instruments. A June 6 report by the trustee in the bankruptcy of the financial technology company Synapse tells just such a story — and should be seen as a warning about future financial crises driven by the exuberance over all things technology.
Synapse was launched in 2014 as a tech intermediary company, linking emerging fintech companies with the online products they need to offer customers the ability to purchase cryptocurrencies, budget, save, invest, manage cash, and make payments online through glitzy apps. Synapse opened 100,000 demand deposit accounts with four FDIC-insured banks, with end users’ balances totaling $265 million.
Those “depositors” naturally wanted their money when Synapse filed for bankruptcy in May, assuming it was insured by the FDIC. But according to the trustee’s report, around $85 million disappeared somewhere between the fintechs’ and the banks’ ledgers. Echoing criticisms we heard all too often about FTX’s record keeping, at least one bank partner told the trustee that “Synapse’s proprietary ledger system is difficult to interpret without expertise from persons familiar with the system.”
Fintech and cryptocurrency advocates have argued for years that unregulated technology platforms can do what traditional banks and investment companies can do more efficiently and just as safely. At the same time, we have been told that we don’t have to worry about those developing markets because 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 those assurances, and the importance of modernized oversight.
Unregulated fintech businesses and cryptocurrencies have reached critical mass, and have become credible — if not sought after — participants in traditional financial markets. While the numbers vary, fintech companies have been valued today at more than $1 trillion. There is another $2.5 trillion in cryptocurrencies represented by 10,000 different coins, as well as about $1.3 trillion in synthetic and derivative crypto securities being sold by Wall Street. Blackrock and Grayscale have accumulated $42 billion under management in their Bitcoin Spot ETFs in just the six months since the Securities and Exchange Commission approved them.
Assuming a conservative $1.5 trillion in leveraged and margin purchases in these markets, the crypto industry has become a $5 trillion megastructure, with estimates have it reaching $10 trillion by 2026. That would make the crypto industry roughly 80 percent of the size of the direct mortgage market in America. Unlike cryptocurrencies, however, every mortgage loan has a home securing it.
Because fintechs and cryptocurrencies have been anchoring themselves to traditional financial markets and piggybacking on the safety and security that comes with them, the government should have been reassessing how to manage the new and increased amounts of financial risk they were creating. But those things have not happened, and they are still not happening today.
There is nothing wrong with the adoration of technology and all the great things that it can do. What fintechs and cryptocurrencies do and how they do it is not really the issue. It is the absence of oversight and the lack of any vetting of their executives that are planting the seeds of the next disaster. FTX’s Sam Bankman-Fried taught Congress and regulators that they shouldn’t be surprised to find shoddy corporate practices and executives of questionable ability or character in companies that have virtually unlimited access to customer funds and no one watching what they do.
Unfortunately, it has been hard to argue that the lesson has been taken seriously.
Synapse was a relatively small company, but a larger fintech or crypto collapse now has the capacity to have a dire impact on traditional financial markets, given the inevitable linkage and integration between traditional and fintech markets recently highlighted by the Acting Comptroller of the Currency. As the size of the non-traditional financial services industry grows with no real oversight, the next FTX, Binance or Synapse may be the trigger that causes a financial tidal wave.
The lofty goal of financial stability that Congress embraced after 2008 is utterly unattainable unless all types of non-banks that solicit and accept the public’s money are regulated more like banks. It makes no sense to overregulate and vet 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 take advantage of consumers’ trust in financial institutions while largely avoiding the regulatory purview that creates that trust. I cannot imagine a better recipe to bake the next financial crisis than continuing 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).
