A policy goal of FDIC is that ordinary consumers within formal insured limits not worry about bank solvency. It is absolutely not a policy goal of FDIC that businesses brokering deposits abjure concerns about solvency. 1/

I agree that it's perhaps too much to hope for, but brokers of deposits evaluate the marginal risk of even FDIC-insured banks versus the interest spreads some banks offer precisely to attract brokered deposits. 2/

FDIC, at least under prior-to-SVB understandings, did not exist to tell ROKU it didn't need to worry about bank solvency when depositing $1B in a single bank. 3/

You can argue — I sometime have! — that basically any depositor-side diligence is too much to hope for, and that regulation must substitute for all of that. 4/

But that is not, even now post SVB, the actual status quo. Business customers retain some responsibility for the banks with which they do business. 5/

In the case of FBO accounts, the very clear obligation of the businesses arranging them is TO BE SURE THEY ARE ADEQUATELY DOCUMENTED SUCH THAT THEY ARE INSURED WITH CERTAINTY BY FDIC. They must be as safe as personal checking accounts at the same bank. 6/

Obviously, Synapse failed to fulfill this obligation. /fin

I don't dispute that Evolve may have been sketch and terrible. The best way to rob a bank is to own one. And you obviously know this story more deeply than I do. 1/

But looking around, it seems that Synapse did not just have one banking partner, and loss of its capacity and role in tracking backing assets was much of the story. The failure was not only at one bank. www.bankingdive.com/news/5-lesso... /fin

I think she's been about the most extraordinary regulator the United States has ever been blessed with. Along with Jonathan Kanter at DOJ. Oh, and Rohit Chopra at an outfit called the Consumer Financial Protection Bureau. He's also been quite extraordinary, extraordinarily active and aggressive.

doctorow.medium.com/https-plural...

An e-mail notification wouldn't have been sufficient or really meaningful. 1/

Because most of us are not acting most of the time in a role of financial professional, defaults on most financial products have to be paternalistically protective. A regime of disclosure and caveat emptor is not sufficient for anything that presents itself as an ordinary savings product. 2/

In the article that kicked this off, people held funds in what they did not believe to be a crypto exchange, right? This infrastructure was used, from many customers' perspective, for ordinary savings. (Is that wrong?) 3/

I understand that it's been frustrating for crypto-affiliated businesses that crypto's gray status limits the range and quality of their banking relationships. But that has been a fact of the world. It imposes real obligations and limitations. 4/

An implication is that perhaps you simply *can't* be both a crypto product and effectively a custodian of ordinary savings. If you are going be a front end for people's saving, you need a quality back end, and crypto affiliation might unduly limit the range and quality available. 5/

You can bristle against that. But it doesn't excuse going with and failing adequately to supervise a sketch banking partner that will intermingle your customers' money with its own prior losses and embezzlements. /fin

Does Evolve survive? That would be a failure on the part of FDIC, for sure. Do customers get made whole? 1/

I'm glad going forward there's a regulatory patch to prevent precisely this occurrence. Is that sufficient? Shouldn't there be a precautionary regime of regulation in place to ensure that new workarounds aren't tried for "more efficient" backing assets? 2/

Should we be excited about deleting CFPB and perhaps FDIC going forward? Synapse was an Andreeson-Horowiiz backed firm. What do you think of their reputation. Should the public place must trust its brilliant ventures? This isn't the first firm in history. 3/

There is so much forgiveness of failure, within the Valley culture. God forbid there be as much grace offered to those who are collateral damage of those failures. That would be expensive! And to prevent it would require, well, intrusive and sometimes burdensome regulation. 4/

Buidl! 🔥🔥🔥 /fin

The setup is problematic, because the money isn't there. The "except insofars" is Syapse's sacred responsibility. If they sleep, I hope they are grateful for God's grace. 1/

If you can't find another partner and your only alternative is to accept a complication of status and diminishment of security of your customers' assets, you wind down. Your business' continuing operation is lower priority than the funds other people have entrusted in you. /fin

So. The backing assets are known, to a first approximation, to be in the custody of Evolve, an FDIC-insured and regulated bank. Yet Synapse, the party whom users entrusted with their savings, was "forced" to transfer these assets to uninsured affiliated entities? 1/

Would you do this with your money? Is this reasonable diligence? 2/

Obviously not. Wealthy people keep conservative assets in FDIC insured titular-accounts, or TBTF institutions deemed tacitly insured. 3/

No "prudent man" consents to their assets getting swept into uninsured SPVs absent an excess return, and understanding they are taking a calculated risk on that return. 4/

Do retail customers sometimes get so swindled? Sure. They sometimes do consent to "sweeps" into underinsured money markets whose risk is inadequately compensated. But Synapse was not a retail customer. It was a professional fiduciary with other people had entrusted their lives' savings. 5/

Oops! It was a start-up! Run by a bunch of twnetty-somethings, maybe! Live and learn. Fucking no. That's why custodial finance is a sphere that requires tremendous, burdensome regulation. 6/

You don't let the backing assets become somebody else's shell game. You don't build a machine with seems through which other people's money can be exfiltrated. /fin