Synapse Saga: The Fintech Collapse That Cost Investors Millions – Italcoins

Synapse Saga: The Fintech Collapse That Cost Investors Millions

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The collapse of a fintech business has left thousands of investors devastated after losing their life savings. One woman, in particular, Kayla Morris, lost $280,000 when the firm went under, only receiving a measly $500 in return.

The fintech intermediary, Synapse, filed for bankruptcy in May, leaving over 100,000 Americans without access to $90 million of their funds, leading to the initiation of a class action lawsuit.

Kayla Morris and her husband had big dreams of purchasing a new home for their growing family after saving diligently from the sale of their property. They entrusted $282,153.87 to the fintech app Yotta, believing it to be a secure investment. However, they were left devastated when Evolve Bank & Trust, which attempted to repay customers after the Synapse bankruptcy, informed them that they would only be receiving $500 back from their initial investment.

Similarly, Zach Jacobs, another victim of the Synapse collapse, saw his $94,468.92 in Yotta dwindle down to less than $130 after his bank attempted to reimburse him.

The victims of the Synapse collapse, including Morris and Jacobs, were largely unaware of the company’s existence until its bankruptcy in May. Yotta and Juno, popular gamified personal finance platforms, relied on Synapse for their financial operations.

Synapse had initially been established in 2014 with funding from Andreessen Horowitz, aiming to help fintech companies offer banking services without the need for full banking licenses. Without these licenses, fintech platforms are not covered by the Federal Deposit Insurance Corporation (FDIC), which ensures up to $250,000 per depositor in case of a bank failure.

Therefore, fintech companies partner with FDIC-insured banks to hold their customers’ funds in special accounts. This necessitates a middleman like Synapse for ledger maintenance and record-keeping.

As of April, Synapse had contracts with 100 different fintech companies serving over 10 million users. However, when Synapse filed for bankruptcy, its banking partners lost access to key systems for tracking company records. This resulted in a chaotic situation where end-users, like Morris and Jacobs, had their funds frozen, and banks struggled to identify the source of deposits.

In response to this crisis, the FDIC proposed a new rule in September mandating more stringent ledger-keeping for funds received from fintech companies that accept deposits from consumers or businesses.

Since the collapse of Synapse, partner banks have been working to reconcile with customers. In a lawsuit filed by Troutman Pepper in September, it was reported that between $65 million and $95 million of the $265 million originally held by Synapse is still unaccounted for.

The aftermath of the Synapse collapse continues to haunt investors like Morris and Jacobs, who face uncertainty over the fate of their life savings. The financial chaos caused by the failure of this fintech intermediary serves as a cautionary tale for the industry, highlighting the importance of robust oversight and proper regulation to protect consumers in the burgeoning world of digital finance.

Picture of Sofia Adams
Sofia Adams

Editor at Italcoins since 2024.

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