TFTC: A Bitcoin Podcast - #522: Breaking Down The Synapse Bankruptcy with Jason Mikula

Episode Date: July 10, 2024

Marty sits down with Jason Mikula to discuss fintech, Synapse, Banking as a Service, and the general state of banking. Jason on Twitter: https://x.com/mikulaja Jason's Substack: https://fintechbusinessweekly.substack.com/ 0:00 - Intro 1:42 - Background on the Synapse case 12:19 - River & Unchained 13:35 - Who is at fault? 20:10 - FBO account structure 24:36 - Impact on end users 30:54 - Gradually, Then Suddenly & Zaprite 32:32 - Unclear resolution and stain on fintech 41:18 - Can small banks compete? 49:46 - SVB and the state of the banking system 57:00 - Are we seeing Chokepoint 2.0? 1:03:58 - Plugs Shoutout to our sponsors: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠River⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Unchained⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Zaprite⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Gradually, Then Suddenly⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ TFTC Merch is Available: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Shop Now⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Join the TFTC Movement: Main ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠YT Channel⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Clips ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠YT Channel⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Website⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Twitter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Instagram⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Follow Marty Bent: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Twitter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Podcast⁠⁠⁠⁠⁠⁠⁠⁠⁠

There were stories of users who, you know, couldn't buy medicine for their kids, couldn't buy food, you know, couldn't pay their mortgage, couldn't pay rent. I can't understate how negatively this has impacted the people, you know, the people caught in the crossfire here. A lot of these programs really heavily leaned on logos and language around FDIC, knowing that people interpret that to mean this is safe and my money is safe. The problem is, what does FDIC insurance do? It protects you against the failure of an insured depository institution, the failure of a bank. There's no rule for the FDIC to step in and make depositors, make end users whole because a bank hasn't failed. You've had a dynamic where money's become freer than free.

When you talk about a Fed just gone nuts, all the central banks going nuts. So it's all acting like safe haven. I believe that in a world where central bankers are tripping over themselves to devalue their currency, Bitcoin wins. In the world of fiat currencies, Bitcoin is the victor. I mean, that's part of the bull case for Bitcoin. If you're not paying attention, you probably should be. probably should be jason welcome to the show thank you for joining us yeah absolutely thank you for having me well like i was just telling you uh brought you on because it's not really

well known in mainstream media at least or not talked about much but there seems to be something going on behind the scenes in the banking sector as it pertains to banks that service these banking as a service startups that have started throughout the last decade particularly Evolve Bank and the current lawsuit they're entangled in with Synapse, which was one of these bass companies. And you've been covering it, I think, for the better part of a year now. And I wanted to bring you on just to help understand what is actually going on. What is the interaction between Synapse, Evolve, the funds that have been misappropriated,

and who this is affecting at the end of the day. So I think just starting off with a little background on the history of Synapse and Evolve specifically. Yeah, for sure. I mean, it is a rather convoluted situation, which makes it difficult to explain succinctly, but I will try. Excuse me.

So there are actually four banks involved, Evolve being sort of the most prominent one. But the sort of ongoing situation also involves a bank called Lineage, as well as AMG National Trust and American Bank N.A., as well as, you know, dozens of non-bank fintech programs that relied on Synapse to provide connectivity to the banking system. So the court case currently unfolding is specifically Synapse's Chapter 11 bankruptcy. So to the extent that there are other parties involved, you know, and specifically Evolve Bank and Trust, right now, that involvement is as it relates to this bankruptcy process. I'll give some brief background on sort of how we got here and then sort of explain sort of what might happen next. So as you mentioned, Synapse is a middleware company. Some people use the term banking as a service provider. Some people might call that model the connector model.

It is a bit difficult because the language isn't sort of standardized. But Synapse itself, not a bank, not even for most of its life a regulated entity, although it did acquire a broker dealer around 2020, and that would be SEC and FINRA regulated. So Synapse last raised capital in 2019. We're recording this now in 2024. Typical VC fundraise cycle might be something like every 12 to 18 months. It was sort of well known, at least within call it FinTech industry, that the company was up for sale. It was being shot by investment bankers in 2023, couldn't find any takers. In early 2024, I reported out that there was a proposed deal for a third-party company called TabaPay to acquire the assets of Synapse.

About a month later in April, that was confirmed when TabaPay announced that it would acquire Synapse's assets as part of a Chapter 11 bankruptcy. So the reason why it was structured that way was to allow Tabapay to acquire Synapse's assets without taking on some of the liabilities Synapse had occurred, including specifically a dispute with its largest program, business banking startup, Mercury. If we want to go into that backstory, we certainly can. So this was sort of like a soft landing, right? TabaPay was going to acquire the assets of Synapse, fold it into its existing business,

which primarily focuses on merchant acquiring. And the lights would stay on, things would keep running. Needless to say, that's not how this has turned out. That TabaPay deal had three key conditions. One, the Chapter 11 filing that I mentioned. Two, most importantly, Evolve Bank & Trust agreeing to fully fund any shortfalls in FBO accounts, which is a type of custodial account, and the court approving a settlement agreement between Synapse and Evolve, which arose from

disagreements about who was responsible for possible shortfalls in these FBO accounts, which to be clear, shortfalls of customer money, end user money, among other issues. So ultimately, Evolve took some time to do an analysis and came back and determined there was no shortfall that Evolve needed to fund. That caused TabaPay to walk away from the deal. And at that point, Synapse basically collapsed into bankruptcy, causing the unprecedented situation we find ourselves in today.

Yeah, from what I understand, there's many layers to this because as you mentioned, Synapse was this bass company, middleware connector type FinTech company that was servicing many other FinTech apps that were leveraging its backend. So this resulted in not, well, the end users of Synapse were other companies,

and then the other companies had end users, which were individual consumers who were affected by this. Could you explain the sort of layered nature of those relationships? Yeah, absolutely. So, I mean, you described it exactly correctly, right? Synapse is a service provider that basically sells services to primarily other fintech companies, although there are other kinds of maybe vertical SaaS companies or like payroll processor type companies that you might not bucket under that label of fintech, but basically companies that needed

some type of access to the banking system, whether that was to receive payments, process payments, hold customer funds, customer deposits in an insured depository institution. And these, over time, included pretty well-known programs like Dave, which is a publicly traded neobank, although Dave transitioned off of Synapse some time ago. Mercury, which I mentioned, which transitioned off of Synapse in late 2023, you know, at the time that user funds were frozen or at the time of the bankruptcy, the largest programs were Yotta, which is a neobank with these sort of prize-linked savings or kind of like gambling-like features, a program called Juno, which offered both crypto as well as like fiat banking or traditional USB banking services,

and an alternative investing platform called Yieldstreet were some of the biggest programs. But there were still maybe 30, 40, 50 programs live at the time that this bankruptcy happened. And then ultimately on May 11th, when end user access to their funds were frozen. So I mean, you have basically Evolve plus the other banks I mentioned,

Synapse is sitting on top of those. Then there is a customer-facing program like Juno or Yotta, which is the service that an end user ultimately signed up for, downloaded the app for, understands their relationship to be with. And correct me if I'm wrong, but the shortfall is somewhere in the range of a quarter of a billion dollars? It's not quite that big, thankfully. So at the time that the bankruptcy commenced and then funds were frozen, which actually it's important to point out, funds were not frozen because of the bankruptcy. These funds that we're talking about in these FBO accounts, unlike in some of the crypto bankruptcies like the Celsius or BlockFi or FTX, the funds in these FBO accounts were not ever property of Synapse, and they are not part of the bankruptcy estate.

However, on May 11th, for reasons that are still not totally clear, Synapse cut off Evolve's access to its systems, which I believe Synapse's now former CEO said something along the lines of it was for maintenance or to investigate some things or something like that. When that access was cut off, Evolve responded, in my opinion and based on my understanding of the situation, not inappropriately by freezing funds that Evolve held and freezing payment processing for funds held at other banks. The reason why I say not inappropriately is because without access to Synapse's systems, it was really impossible for Evolve to continue operating those programs in a safe, sound, and responsible manner as far as making sure that transactions were

processed correctly, proper fraud checks, money laundering checks, and whatnot. So again, the freeze of funds is related to, but not really caused by the bankruptcy. As far as the amount, at the time that these programs were frozen, the amount was something like $260 million. Since then, approximately $100 million of funds have been returned to end users of certain programs from certain banks. And the shortfall, so the gap between what end users are owed and what the banks, the collective four banks actually hold, is somewhere between $65 million and $96 million. The reason why that is a range is because there's potentially as much as $31 million in funds that are actually funds that are owed to Synapse as far as being revenue from deposit rebates, interest payments, or the like.

And so there's a little bit of still now ambiguity as far as how big is that shortfall and certainly ambiguity about what caused that shortfall. This episode was presented by River. River is the best, most secure place to buy Bitcoin in the United States. Go to river.com slash TFTC, set up an account today. You'll be able to DCA into Bitcoin without paying any fees. You'll be able to give people Bitcoin via River links. You'll be able to send and receive Bitcoin over the Lightning Network. And you'll be able to set limit orders.

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an IRA product, a lending desk, and they're rolling out a bunch of other products, including an inheritance protocol and sound advisory. So go to unchained.com, set up a call with our concierge onboarding team today, tell them that TFTC sent you and use the promo code TFTC at checkout, unchained.com. And so from your position, based off all the research that you've done, is this some sort of domino effect that was started by Synapse not running their business correctly? Is it a miscommunication between the banks that they're leveraging on the back end? It's still not clear to me. Who's at fault here? Is it the banks that are at fault? Is it Synapse? Is it a combination of the two?

I mean, it's a difficult question to answer not knowing all of the facts. That said, I think it's pretty clear that sort of everyone holds some level of responsibility here. Strictly speaking, from a bank regulatory lens, Synapse, generally speaking, and these end programs, Yotta and Juno and Copper and all that, they are not licensed regulated entities. So the way that most people would think about them is as service providers to the banks that they're working with. Now Synapse's model is, again, I'll use the word convoluted, is even quite different than other companies that operate these middleware platforms. Synapse is not the only one. You have companies like Unit and Treasury Prime, Bond, which was

acquired by core banking provider FIS. So Synapse is certainly not the only one. Earlier, I mentioned the four banks and I also mentioned that Synapse acquired a broker dealer. What Synapse chose to do and begin to transition towards is what they referred to as a modular banking model. And instead of having a checking account, or you might hear the phrase demand deposit account or dda which was actually directly affiliated with one of these banks synapse moved to a model where end users would have technically have brokerage accounts with a cash management feature and again that is not in and of itself crazy right like if you have an account at fidelity or at robin hood you know this is a pretty standard structure the purpose of it

Well, there's a couple of purposes. One is if you're trading stocks, you could have money sitting in that brokerage account at the end of the day that's not invested. That money needs to go somewhere. So you can have it swept into an associated bank account where it will typically earn whatever a decent rate of interest and also be FDIC insured. The other thing a cash management feature can let you do is use that brokerage account very similarly to a bank account, right? You could get a debit card that's tied to your Fidelity account. You can even sometimes write checks tied to that account. So legally speaking, it'll be a brokerage account where cash is swept to one or often multiple banks through a sweep network. But to an end user,

it'll often look and feel like a quote unquote bank account. So the reason why I bring this up and I'm aware that it's confusing is because it does have some important impacts on sort of who is responsible or frankly, at this point, introducing a lot of confusion about who is responsible. So the four banks I mentioned, the Lineage, AMG, American, and Evolve, provided different services to the brokerage. So those four banks had relationships with Synapse and or with Synapse brokerage to hold money as a custodian, to act as an RDFI, which is a receiving depository financial institution, meaning if you wanted to get your paycheck put into this account, you would see the name Evolve Bank and Trust, and you would see the routing number

because Evolve acted as the RDFI to accept that incoming payment. Lineage acted as an ODFI, meaning Originating Depository Financial Institution, to send out ACHs. And at various times, both American and Evolve issued debit cards tied to these programs. So you can imagine how complex this structure is, where instead of having everything at one bank, if you walk into Chase and you have a bank account there, your money's held at Chase, Chase accepts incoming money, sends outgoing money, and issues the debit card. It's all sort of in one place. Here, you had functionally something that looks like a bank account but is legally not. It's legally a brokerage account.

And then you have the pieces of it that make it run, spread over four banks, stitched together by Synapse, which is operating the technology platform that sort of pulls all these pieces together. And so to try to get back to your original question, you know, there were rumors, allegations, reporting that I did about shortfalls in customer funds dating at least back to last October. And at that time, you know, the sort of story was that it was due to a incorrect configuration about basically where bills Synapse owed were being debited from and that is being debited from end user money, customer money, instead of being debited from Synapse's money.

You've also had allegations made by Synapse's co-founder and former CEO Sankit Patek saying that when Mercury moved off of Synapse's system and began working directly with Evolve, that it moved in total about $50 million that didn't belong to it. Now, I don't know if that's true or not true. At this point, it's just an allegation. But there are sort of open questions of, you know, was this just sort of like incompetent that snowballed? Was there intentional wrongdoing?

You know, at this point, it just remains really unclear what caused this, what caused the shortfall. mm-hmm so it seems like in an attempt to level up their services synapse engaged in some form of regulatory arbitrage leveraging this broker dealer to have a quasi bank account for their end users and that confusion ensued from there because we see this a lot in the bitcoin space where companies will leverage a trust or something so that they can piggyback on their money transmitter licenses so that they can service end users, which puts them in a bit of a vulnerable position if the trust itself gets into some trouble, which we've seen with Prime Trust

specifically. So is it similar to that? I mean, I would say the outlines are broadly similar. And again, you know, there are, I think, plenty of companies, non-bank fintech companies that use somewhat similar models that haven't had these kinds of problems, right? So, you know, I mentioned that the FBO account structure, and it may be helpful to illustrate, you know, how and why that can become a problem. So the, you know, FBO legally,

what that stands for is for the benefit of, and you can think about it as, you know, let's say there's a pool of $100 million in an FBO account. account at Evolve. The title, like the literal legal title on that account might be something like Synapse Financial Technologies for the benefit of end users of Yotta, right? Evolve does not know who that money belongs to in that example. All Evolve knows is it's not Synapse's money, and it's not Yotta's money. It's money that belongs to the end users of that program. And the bank is relying on these external third parties to maintain the necessary books and

records to understand of that big bucket of $100 million, how much belongs to Marty and how much belongs to Jason and how much belongs to everybody else. And again, I'm not saying that this is not a common practice. A lot of US fintech is built on this model for a whole bunch of reasons. I mean, the two main ones being the commercial terms that core banking providers typically charge, where they actually charge on a per account basis, which causes disincentives for banks to open up a ton of accounts on core inside their own system. The money transmitter license thing that you mentioned, there's also an issue around

fintechs not necessarily wanting to go through the hassle of getting MTLs and using FBOs as a mechanism to try to avoid that regulatory burden. There's a number of reasons why the structure is in play and also it is possible to do it correctly and responsibly. In this situation, part of what we're seeing unfold now is Evolve and Lineage combined have something like $100-ish million, and they either don't know who it belongs to and, per the court filings, don't believe that Synapse's records are accurate. it. They're saying, and this is per the court filings and statements their attorneys have made to the court, they're saying what we see in Synapse's ledgers, which is like the records

Synapse holds, does not match the actual flow of funds in and out of these accounts. We can't trust them because the bits and pieces we can verify don't add up. And so, again, If the bank doesn't actually hold the records, it is paramount that the third party or third parties, in this case, running the programs, have accurate books and records. Otherwise, you know, if something like this happens, you get to a pretty catastrophic situation, which, you know, we're chatting here in July. You know, those users haven't had access to their money since May 11th. It's been, you know, two months plus. Yeah, and to highlight what this means for this end user, I mean, you've reported on it. I've seen people in Reddit threads.

I mean, these are people who are dependent on these companies to be their quasi-bank account so that they can pay their bills and go about their lives. And a lot of people have had their lives put on pause for many months now. yeah i mean i you know i've heard plenty of um the end impacted end users who have actually called into the court proceedings and expressed to to the judge or to the court how it's impacted their lives you know certainly there's been reporting in american banker in the in the new york times and cnbc um and again i mean imagine you know a lot of these fintech services cater to lower income users or lower income households, you know, and or users that may have limited access to credit or limited experience in the banking system. And I mean,

can you imagine if you had your only bank account that had, you know, where your paycheck went into, and you just stop being able to use it at all? You know, and that would be bad for anybody. But you start to think through the actual like practicality of like, okay, you know, if I need to go and change my direct deposit at HR, but like maybe that might take one or two pay cycles, maybe my last paycheck hit my account and bounced back, but then like they won't reissue it. if you're living paycheck to paycheck, you probably can't wait two to four to six weeks to work through, you know, some HR paperwork and, you know, the fun realities of how ACH as a payment rail works in the United States. You know, there were stories of users who, you know, couldn't buy medicine for their kids, couldn't buy food, you know, couldn't pay their mortgage, couldn't pay rent. I mean, one, you know, one impacted user actually sent an email

to the judge saying that they were suicidal over the situation. So, I mean, I really, you know, I can't understate how negatively this has impacted the people, you know, the people caught in the crossfire here. And I'll also sort of take a moment to reiterate a lot of these programs really heavily leaned on logos and language around FDIC, you know, knowing that people interpret that to mean this is safe and my money is safe. You know, I actually at some point used the internet archive, the Wayback Machine, to look at some of the websites and it's just like plastered everywhere. And, you know, on the one hand, I mean, they may not have like properly disclosed exactly how deposit insurance works in this circumstance. But technically speaking,

that was true and remains true, right? If you used a service like Yotta or Juno through Synapse and your money was sitting at Evolve or AMG, those funds were and are FDIC insured. The problem, And I'm not, by no means am I blaming any average consumer for not understanding this. The problem is, what does FDIC insurance do? It protects you against the failure of an insured depository institution, the failure of a bank. A bank has not failed here. And the trustee for the Synapse estate, who actually is the former chairperson of the FDIC, Yelena McWilliams, sent letters to all of the key regulatory agencies implicated here, all three major bank regulators, the FDIC, as well as the OCC, which oversees nationally chartered banks, and the Federal Reserve Board, which oversees state chartered banks that are members of the Federal Reserve System,

as well as the SEC and FINRA, and basically said, can you make resources available? What can you do to help these end users, these consumers? And the feedback, it varied a little bit, regulator to regulator, but it was basically, we don't have legal authority to act and intervene in this situation, you know, what is fundamentally a business dispute between Synapse and this bankruptcy process, you know, our job is to oversee the banks. And, you know, to the extent that they're, in the case of Evolve, that would be the Federal Reserve, to the extent that there are actions, you know, supervisory actions, enforcement actions that need to be taken there, you know, that's what regulators will do. But there is no, there's no rule for the FDIC to step in

and, you know, make depositors, make end users whole because a bank hasn't failed. And I mean, I really do see both sides of this in the sense that, you know, I understand banking law. I understand the role of the FDIC and that is legally speaking correct. You know, on the flip side, you know, I think you mentioned SVB. You know, people look at the failure of SVB in spring of 2023, and a couple of angry tweets from the all-in crew, and all of a sudden, the FDIC is invoking the systemic risk exception. And lo and behold, every dollar of every depositor, uninsured or not, is being made whole. And again, there's a lot of reasons why those situations are not exactly parallel or comparable, but I do think at like a narrative level, you know, the optics on

it are really awful of, oh, rich Silicon Valley VCs or, you know, rich companies that had hundreds of millions get bailed out. And then the guy who, you know, can't pay his rent or whose car gets repossessed or who racks up a ton of credit card late fees, you know, they're just screwed because, oops sorry we can't do anything so i do you know i see the the legal banking side but i also see the human side of this story quick break here freaks this rip is brought to you by gradually then suddenly a framework for understanding bitcoin is money by parker lewis i wrote the forward to the book i'm honored to have done so because it's the best zero to one primer if you're looking for a logical explanation of why bitcoin obsoletes all other money buy one for

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rail by accepting bitcoin as payment using zap rate and reduce risk for your business i've done this for my business here at tftc we use zap rate it allows you to easily create invoices payment links or connect e-commerce stores, connect your wallets or custodial accounts and be set up in minutes. We can also connect our bank accounts, our Stripe accounts, our Square accounts to accept fiat as well. The time is now, freaks. The fiat system is fragile. Invest in the infrastructure that de-risks the future. Invest in yourself. Bitcoin payments with ZapRite. Go to zaprite.com slash TFTC to get $40 off their annual subscription. Zaprite.com slash TFTC, $40 off. Two questions. How do you see this coming to a resolution? Is a resolution even clear? Is there a clear path to a resolution at this point in time? And then two, will this Synapse debacle really put a stain on the sector of fintech, marketing of service, connectors?

Because as a Mercury user myself, I think the UX, the UI that Mercury specifically has brought to the banking sector or the neobanking sector, whatever we're defining Mercury as, is incredible. I love the product and I haven't used many of the others. Mercury is probably the only one I've interacted with directly. but compared to Bank of America, Chase, it is a way better user experience. And I would love to see innovation in this area, particularly around UX, UI, and value-added services. But does this create a stain that will make it harder for these type of services to proliferate moving forward? I mean, to answer your first question, you know, the route forward here is really unclear, right? So as I mentioned, you have had AMG specifically return approximately a hundred million in funds,

which it claims it was able to reconcile to the penny. Now I will say it's a little unclear exactly how it went about that reconciliation or what it was reconciling against when, you know, as I pointed out previously, you have these two other banks, Lineage and Evolve that say, we don't trust Synapse's records. They don't make sense vis-a-vis money movement we actually saw in these accounts. So it's unclear whether or not maybe AMG jumped the gun on returning some of those funds. So there's a little bit of ambiguity there, but they did return about $100 million. dollars uh you know as far as the the remaining i mean you have the remaining money sitting at primarily at lineage and evolve and then you have this unknown shortfall between 65 and 96 million

dollars um you know this is not going to be you know welcome news for for any impacted end users who happen to listen to this i i'm not particularly optimistic on a quick resolution here I will say like the one recent piece of news that I do think is promising is that the Chapter 11 trustee did engage a financial advisory and forensic accounting firm, B. Riley, to assist in basically parsing this data, trying to figure out what happened, you know, what the shortfall is, what caused it. there is, I mean, in my mind, there's quite big unknown, which is, let's say, let's take the most optimistic case that the shortfall is 65 million. Who's on the hook for that 65 million? Particularly because the banks in question, both Lineage and Evolve are not, I mean, in the scheme of the American banking system, they're both very small banks. Lineage, in fact, was the smallest bank in the state of Tennessee

until it started engaging in these banking as a service programs with Synapse and with another similar company. Evolve is somewhat bigger, but it has about 1.5 billion in assets on balance sheet. And if memory serves, equity capital is like 150 million. So bigger, but still in the scheme of things, quite small. So yeah, I mean, there are definitely,

definitely still a lot of unknowns as far as how does this proceed when will users get money back will they get all of their money back um still a lot of unknowns there to answer your second question you know the the synapse situation is kind of the most extreme outcome um that i could imagine you know and i have been following sort of this bass or partner banking space for probably two years in pretty close detail. It's certainly not the only program or the only bank to get in trouble. In the past two years, you've seen a significant number of banks that operate these partner models get enforcement actions from their regulators, including Lineage, which I mentioned, which was due to primarily due to his relationship with Synapse, Metropolitan Commercial Bank,

which at some time had quite a number of crypto programs, First Fed, Choice Bank, which actually also partners with Mercury, Blue Ridge Bank. So, you know, there's been what I would call kind of a broad sweep of banks operating in this partner banking space or this BassBase. I certainly do think the Synapse situation and just how catastrophic it's been for end users makes this much more tangible and concrete, right? If you look at some of the consent orders for these other banks, there are broad themes, Bank Secrecy Act and anti-money laundering being present in basically all of them, except for Sutton, third-party risk management, board governance. But those are very abstract topics. If you went and talked to an average

person on the street, they probably have no idea. Maybe they have an idea of money laundering from watching TV. But generally speaking, these are kind of abstract ideas. The idea of your bank account being frozen and losing access to your money is something that is very concrete and very tangible. I mean, even earlier today, you had the Fed Vice Chair of Supervision, Michael Barr, give a speech at an event, I believe, on financial inclusion. And he didn't specifically name Synapse, but the comments were quite clearly directed at the situation and talking about the need to have proper controls, due diligence, et cetera, in place.

And so like I said, we've seen a significantly elevated level of scrutiny on this sort of banking as a service operating model at least since 2022. And I think Synapse is only likely to escalate that given the level of customer harm that's taken place here. And it's also worth mentioning, you know, apart from the customer harm, Evolve got a very wide reaching enforcement action from its regulator, touching on, you know, some of the topics I mentioned, as well as its inadequate information security practices. That consent order came out,

I think, about two weeks before it was revealed that the bank had been hacked by a Russian ransomware group. So, I mean, there's a lot of moving pieces right now, but I think the broad picture is absolutely heightened scrutiny, heightened pressure on banks that are partnering to power these non-bank programs. I do take your point that it's like often innovation for a lot of reasons, tends not to happen inside the banking regulatory perimeter. And so you've seen it with companies like Mercury or Chime or Dave or whatever. There's a lot of reasons why both culturally speaking, business culture speaking, and regulatory speaking, that banks tend not to be very good at doing innovation. But I do think this sort of wave of enforcement actions,

the Synapse situation, and now this Russian hack debacle, it's certainly going to make regulators take an even closer look at banks that are engaged in these business models, as well as potentially serve as disincentives for some banks that may not have the right resources or expertise to operate these models in a responsible way. yeah i forgot to mention the double whammy with the uh the data leak mercury made me aware of that a couple of weeks ago which is uh never fun but beyond that point i it is it is interesting when you consider the landscape of the banking sector here in the united states particularly post 2008 all the consolidation that's happened into the big four um i think we've gone from thousands

of banks to i believe under a thousand now at this point it could be wrong um the i'm wrong what is it like so i mean i think the the trend you're highlighting is absolutely correct you know the number of banks has been steadily declining since like the late 1970s um currently there's a bit over 4,000 licensed commercial banks, and there's another like 4,000, 4,500 credit unions. But I think the trend you're pointing out is absolutely correct, that the number of banks has been declining at this point for decades. And even the number of branches, which feels like very old school. Every time I look up this number, I have to double check. The number of branches continued increasing until 2008, 2009.

And then at that point, it starts coming down with a rise of mobile banking and all that. But I think you are right to flag sort of the trend and ask the question, you know, why is this happening? And what does it mean for access to banking and financial services, as well as like the health of a lot of the smaller communities that are served by, you know, small banks. And that, you know, that has been, you know, we've really been talking a lot on call it the demand side for, you know, fintechs that need banking services. But there's sort of another side of this equation, which is why have banks, and again, particularly smaller banks, sub 10 billion, Durban exempt, that earn more interchange income, why have they been, relatively speaking, eager to enter into these partnerships and enter into these vast business models?

I mean, there's a whole lot of factors that go into that. I mean, being a small bank, especially being a small bank post-2008 with increasing regulatory burden, as well as being a small bank just sort of in the modern technology era where JPMorgan Chase spends literally billions of dollars on tech and R&D every year. if you're, you know, the banks that we're talking about, Lineage and Evolve, you, in no way can you possibly compete with the amount of money larger banks are spending in those areas. And, you know, FinTech, as well as these banking as a service middleware platforms, really offered a lifeline as far as offering banks that historically have served a defined geographic area through their branch footprint to sort of enter the 21st century and through partnerships, through sort of different digital distribution channels, source deposits, generate fee income.

The two, not to go on like a how do banks work tangent, but to make it super simple, banks generate a spread net interest margin on lending or they generate fee income. And so with the declining importance of branch banking and geographic footprint, these fintech programs and BAS models offered a way for small banks to play in that space that otherwise they really wouldn't be able to. yeah it seems like the smaller banks trying to figure out how to compete with the systemically important banks as they're referred to today sort of stepped out on the risk curve of counterparty risk with these startups just to try and compete which begs the question like is the regulatory environment too burdensome to enable the competition that many people would like to see or is it is there something more systemic in the back like is the liquidity situation such that

it may be impossible for these smaller banks to compete and we're just forced to consolidate into these much larger, systemically important banks that we'll never really get to know about. I mean, the U.S. banking system, to put it bluntly, is bizarre, I mean, compared to any other country. And I don't just mean any other, like, developed country. I really mean, like, any other country, right? So, you know, I live in the Netherlands. There's really, like, three banks here. ABN AMRO, ING, Rabobank. Canada, I think, has five. But even in a country like Mexico, which people might put in the developing bucket, Mexico has four or five banks that control the majority of the market. I mean, this is true pretty much everywhere. Now, I'm not necessarily

saying that that is a good thing or a bad thing, rather that it tends to be the reality of most markets. Now, the US has a very interesting history. And again, I will try not to be like boring history teacher here but the dual state federal banking system means that both individual states illinois texas california could charter banks uh through their you know their local or state level banking commission and the national government could charter banks through the occ you also until i'm going to forget this off the top of my head but like 70s 80s you had restrictions on interstate banking and branching. And so this really was a regulatory either prohibition or disincentive on the sort of mega banks we see today. I mean, I can remember,

you know, in the course of growing up and I lived in the same suburban Chicago town, you know, my entire life until I went to university and seeing the same bank change hands from like American National to Bank One to Chase. There's probably like five or six before that. And so there were real regulatory reasons why it was the way it was before. And there are real regulatory reasons why you're seeing this trend towards consolidation now. I mean, I think something that you're hinting at is there are competing public policy priorities. We can talk about systemic risk or safety and soundness. We can also talk about competition, financial crime risk and money laundering, and access and inclusion. And the reality is these things are

not all achievable to 100% at the same time. If you want to sort of tamp down on financial crime risk and money laundering, one of the ways that you're going to do that is by heightening KYC, KYB requirements, increasing the thoroughness of transaction monitoring. And that can actually have the impact, intended or otherwise, of causing banks to de-risk certain kinds of customers or certain kinds of transactions. So, I mean, the point I'm trying to make is like, well, you know, depending on what is a public policy priority at any given time, sort of what is the top of the stack, you know, you may say, you know, we don't want to see Chase get bigger. It's already, you know, the biggest bank in the country. But when First Republic blows up, and you need to

broker somebody buying that bank, look who's here to save the day. It's JPMorgan Chase, right? And And so, you know, there's this constant give and take between these different policy priorities and regulations. And, you know, it's just not possible to achieve all of them simultaneously. Yeah. Yeah. And anything about what's happening in Europe with UBS and Credit Suisse? and so what are i mean with this in mind like what are your thoughts on the overall health of the banking system right now a year and a few months away from the svb blow up signature

silvergate all those there was many people were worried at the time that that was going to lead to 2008 like systemic domino effect obviously the fed fdic stepped in he had the btfp program which just ended um but it seems that uh a lot of and another interesting thing earlier this year which actually went under the radar as well is that they took treasuries out of the reserve ratio um for a lot of these banks as well and so with all that in mind what are what's your take on the overall health of the banking sector not only the small banks but the larger banks as well Yeah, I mean, I'm, you know, with a strong caveat that I'm not like a bank equity, bank balance sheet analyst, you know, sort of the big post-SVB thing that everyone was paying attention to was bank securities portfolios and the level of interest rate risk they had taken, you know, to try to juice returns. And then as rates went up, putting those portfolios underwater, so not necessarily at a true solvency risk, assuming that they had the ability to hold the securities to maturity.

but of course, you know, you get a situation where there is a loss of confidence. And I think one of the interesting things about the SVB story, and this maybe speaks a little bit to a certain level of hubris at that organization, was in part, it was like a communications, you know, unforced error of saying, you know, we're going to go out and raise capital and having that capital raise fail. and sort of how the messaging around all of that was handled, right? You know, I think now, certainly there's still, you know, some level of risk as far as elevated interest rates

vis-a-vis where banks' securities portfolios are. And I think the bigger problem that people are paying attention to now is around commercial real estate, and particularly concentrations of commercial real estate lending in certain kinds of banks, in certain geographic areas. Again, I don't actually spend a ton of my time looking at this at a sort of sector-wide or bank balance sheet level, so I'd hesitate to offer too much more than that.

That makes sense. The commercial real estate market doesn't seem to be doing well right now. And that's the thing with these banking crises is you don't know how weak these banks are until they're put in a very stressed situation. And you have to tap the FDIC on the shoulder of the Fed and say, hey, we need your help, or JP Morgan for that matter. Yeah, I mean, sorry, now I'm just remembering the SVB thing. It happened while I was actually trying to take a real vacation in Mexico, and then it quickly became less of a vacation. But even some of the steps regulators have taken since then, and I forget if this was SVB specifically or if it was First Republic or somebody else, around having the right literal operational procedures in place to tap the Fed discount window should they need to. So some of these things which, you know, again, if you're not like a hardcore banker person, you might not understand what they are or why they matter.

It's like, you know, ideally, your bank doesn't ever need to pledge assets at the discount window. But like, there's a reason why it's called the lender of last resort, right? Right. And so, yeah, I mean, I think we've seen a number of, you know, guidance documents, policy documents come out in the wake of, you know, SVB, First Republic signature in each of these are like a little bit idiosyncratic there. you know, there's some similarities and some differences, but to try to both raise awareness and then address, you know, some of the sort of solvable problems that, you know, may have occurred and contributed to those failures. Yeah. No. And you got to think both the banks and the regulators. I mean, SVB being a perfect example of how bank runs can materialize in the digital age, particularly social media of peter teal sent an email out to founder fund companies and

that leaks and within two days the bank is essentially bankrupt uh it was as i mentioned before we hit record it was a stressful time for us as well but um yeah i think the the nature of how bank runs can happen today is completely new monster even compared to 2008 with social media being as prolific as it is and well and it's it's interesting you know to think about the potential implications as the us finally slowly creeps towards faster payments right i mean you know clearinghouse rtp real-time payments has been around for a while it's not necessarily like widely available through your banks like ux as far as like oh i want to send you a payment like instantly via rtp versus any other mechanism and now the you know it's approximately the one

year anniversary of the rollout of the fed's instant payment rail fed now um you know certainly there are you know mechanisms policies etc that you can put in place to try to address potential liquidity risks from having those faster payment mechanisms but you know the i forget the exact numbers at this point. But I mean, if you were withdrawing money from SVB during that time, you know, typical ACH is I'm going to put in a request and it's going to process in a batch overnight, right? And so you can have whatever, you know, tens of billions of dollars that are basically queued up to go out the next day. And of course, this is Monday to Friday, you know, no bank holidays, all that. But imagine if you have a 24-7 real-time payment rail,

plus all the sort of you know social media whatsapp group you know uh groupthink contagion that was in play during svb you know you could certainly imagine a bank run like svb happening even more quickly um you know if real-time payments uh were widely available yeah it's a brave new world out there and with that in mind like just to wrap up I know I mentioned in the email I sent with some questions

like do you consider what's happening between Synapse and now with the regulatory scrutiny on the banks and the bass industry more broadly could that be seen as an extension of Chokepoint 2.0 And then as it pertains to Bitcoin companies trying to get banks, bank accounts, that's been that's been hard.

And do you see this affecting the ability of Bitcoin and broader crypto companies to get bank accounts? Because they're seen as riskier than even these fintech bass players. Yeah. So, I mean, I think there are a couple of different strands here. I will point out that, you know, Operation Chokepoint, sort of the original Operation Chokepoint, has almost taken on mythology that I think is causing a pretty severe amount of confusion about, like, what really happened. I will try to, like, resist the urge to go down that rabbit hole. But, you know, there were several Office of Inspector General reports about that. It found little to no involvement at the FDIC to the extent that there was any focus. It was not on any of these sort of disfavored industries like gun manufacturers or ammunition

or tobacco or whatever. There was some impact on payday lending, which is actually an industry I know a lot about because I worked in it for five years, as well as RALS, which is like a refund anticipation loan, where the OIG did find there was like a bit more, you know, potentially like inappropriate pressure coming from bank regulators. But really like the sort of narrative that the whole thing took on about the original like Obama era choke point of like cutting off gun sellers from the banking system is just patently untrue. On the other hand, and again, I'll caveat that I know a bit less about sort of policy and how the policy has impacted crypto or any sort of like crypto

blockchain related companies. So I'm going to speak here at like a very high level, but it certainly is my impression from following policymaking out of OCC, FDIC and the Fed that, you know they can't explicitly say don't do crypto stuff but they can create um you know overstate or regulation that is so burdensome that it basically says the same thing or functionally acts the same way so i think you know particularly post silvergate uh as well as signature uh and And then along with FTX, BlockFi, Celsius, all of the crypto firms we saw, which by the way, have links to Evolve, FTX did, BlockFi did, not to the same extent as Silvergate, et cetera.

I do think that there's been a pretty clear telegraphing from bank regulators, including with things like the Fed's novel activities program, that if you do anything with crypto we're going to take a very, very, very close look at it. Yeah. So, I mean, to that extent, does that serve as a major disincentive or does it adjust the cost benefit, cost, you know, risk benefit calculus of a bank choosing to either, you know, partner with, empower a crypto company or even to offer a bank account, like a business bank account to a crypto firm? You know, I think it's fair to say the answer to that is probably yes. You know, when it comes to like setting aside the crypto piece and talking about like BaaS and partner banking, I mean, you've already seen this to a certain extent, right?

Where the expectations from a bank for onboarding a fintech program have gone up considerably. I don't necessarily think that's the worst thing. in the sense that particularly in the 2020, 2021 period, when you just had buckets of VC cash getting splashed around to anyone with a half-baked idea and a pitch deck, if it was a FinTech company, you probably needed a bank partnership to make that happen. And as the slew of consent orders has made clear, a lot of these banks either weren't doing the necessary due diligence and third-party risk management, didn't know how to do it, didn't care, um and so you know there has been the pendulum has swung right and so you know what is the result of

this heightened level of scrutiny you know some people have complained oh you know they're changing the rules or they won't tell us the rules i don't think that's really the case i think it's more like you know collectively the three major bank regulators federal bank regulators weren't paying a lot of attention to to this sort of bass partner world and then it grew extremely quickly from about 2019 to 2022 uh during covid with all this vc money with these new middleware platforms then they realize like oh hey like we have some problems here whether it's like bsa aml problems third-party risk management consumer compliance you know there's this cycle of enforcement actions some banks will decide, maybe this is not the right business for us. We don't have the right

expertise. We can't afford to make the right investments. Blue Ridge sort of is doing this where they're saying, we're going to go back to our community banking roots. Other banks will say, hey, we took the rap on the knuckles. We're going to make the investments we need to make. And we're going to continue to serve this line of business. In my mind, it's not fundamentally different than what we saw in the early 2000s with banks like Bancorp, and then it was known as MetaBank, now it's known as Pathword, with prepaid cards, which were fundamentally quite similar as far as being a partnership model. And so yeah, there's some pain happening right now. Some banks will probably choose to exit the line of business, other banks won't. We'll probably see

fewer fintechs, which I think is appropriate because not all of these companies have a viable business model. We'll probably see, no, we already have seen fewer middleware platforms. And, you know, I think to a certain extent that's the market working. Yeah. Natural cleansing event is unfolding right now. Jason, thank you for your time. This has been a wealth of knowledge on this particular topic, which I've been watching from afar with bated breath,

considering uh the the nature of mercury's involvement with evolve can i get can i get my quick my quick plug-in which is they can subscribe your listeners can subscribe to my newsletter at fintechbusinessweekly.com or find me i'm still on twitter for some reason and on linkedin yes you can plug you just did and uh we uh we'll put all this um we'll put all this in the show notes as well how often are you putting out the newsletter at least once a week i do well the the normal cadence is supposed to be weekly um but with all the with all the chaos between the hack and all the court hearings you know i've done some like breaking news updates for my own personal sanity though i'm trying to get back to to once a week okay awesome go uh

go subscribe if you're, if you're interested in all this stuff. I've been, I went back and read your back catalog a couple of weeks ago just to get a better understanding of what's happening here. And, um, it's very valuable information because it's so niche and, uh, yeah. And it's complicated. And if you don't, if you don't know the history, you know, and this took me a long time to learn as well as like, Oh, like so much of what's happening right now, we saw in the early two thousands and so much of that had to do with something

else so yeah it takes a while to to learn and and if you're uh a nerd like me and you're interested it's a great resource i hope it is a great resource uh speaking from experience jason please enjoy the rest of your night in the netherlands and thank you so much for joining us it's been uh an incredible conversation yeah thanks for having me all right peace and love freaks