FDIC Insurance at Yotta? (2024)

At the May 17th hearing involving Yotta, Synapse, Evolve, and several other banks, an FDIC representative testified that there is no FDIC coverage available for the frozen accounts. I was surprised to hear this and I wrote a post expressing my concerns about the FDIC insurance status of these funds. Many banking and regulation professionals in my network sprung up to comment that it's evident that Yotta is not a bank and no FDIC coverage applies. They've pointed out that using FBO brokerage accounts does not mean being FDIC-insured. They explained that none of these are "banks" but technology companies. While I understand it better now, I did not understand any of this before. More importantly, so many terms of art (i.e., "bank" vs. "technology provider" or "broker") and the application of regulatory law exacerbate the problem.

In this post, I set aside the insider knowledge I've now acquired about how the FDIC program works and consider this from my perspective as an average consumer who learned about the coverage from Yotta.

When I signed up to use Yotta, I didn't do any external validation of the regulatory claims. However, I read up as a single father who used Yotta for family savings, and my daughter used Yotta for college spending in Yotta (her only bank account). I carefully reviewed Yotta's communications about FDIC insurance. I proceeded just as most customers did. After reading Yotta's representations, I believed them and didn't research them further. Given the reports of others who have put their life savings in Yotta, I know I am not alone.

Here's an analysis of why Yotta customers reasonably believe they have FDIC coverage and the troubling reasons their funds may not be insured. I've provided a scan of the relevant documents here: https://altlaw.net/YottaTOS. All of the references below can be found in this link.

Assurances of Insurance

Yotta has communicated to its customers via emails and contractual agreements that their deposits are covered by FDIC-insured banks. For instance, in an email communication, Yotta assures customers:

The Terms of Service further reinforce this commitment by stating:

By email communication and the terms and conditions, it's reasonable to conclude that the deposits in Yotta are insured by the FDIC. In my case, as is the case with many customers, I did not look further than these words from Yotta. However, I've now learned that Synapse is a brokerage company and payment processor that plays a role that I did not previously understand.

Role of Synapse and Its Terms of Service

Synapse is a backend software provider partnering with financial institutions to enable payments and banking services, including for Yotta. The terms of service related to Synapse introduce additional considerations and contradict the understanding of FDIC coverage for the accounts. According to the Synapse Brokerage LLC Customer Agreement:

What does this even mean? If funds are withdrawn and "transferred to [my] account," why does this make them ineligible for FDIC insurance? Apparently, how I spend money or transfer funds affects my FDIC insurance coverage. I frankly don't understand this. The agreement highlights:

After reading this, I'm left without understanding the limits (is it $250k or $500k). Moreover, I have no idea what these other "program banks" are nor how I can transfer funds to them, out of them, or within them in any way that would affect FDIC coverage. Also, according to the Synapse terms, funds deposited before the effective date of the Synapse cash management program are not eligible for enhanced FDIC insurance:

Does this mean any savings I deposited before the program's start date (but still in the account) do not benefit from the enhanced insurance coverage? Do I need to withdraw and re-deposit these funds for coverage to occur? As a consumer, it's unclear what, if anything, I can do to affect the coverage of funds.

Conclusion

The current situation with Yotta and Synapse has left thousands of ordinary people without access to their daily spending money and utterly confused about the safety of their deposits. Given the conditions and inconsistencies outlined above, customers are often led to believe that their accounts have FDIC coverage. However, the reality is that coverage depends on several factors, including the timing of deposits, the movement of funds within and outside the program, adherence to the terms set forth by Synapse, and other complexities, none of which are in the customer's control.

Becoming a banking regulatory specialist should not be a prerequisite for being a banking customer. Everyday consumers should be able to trust the clear representations made by the companies they entrust with their money. They should not have to wade through pages of complex legal agreements to decipher the actual extent of deposit insurance. The FDIC and other regulatory agencies, such as the Consumer Financial Protection Bureau (CFPB), have a critical role to play in correcting this confusing and potentially misleading situation. Swift action is needed to investigate the discrepancies between Yotta's claims and the reality of insurance coverage, to provide clear answers to affected customers, and to ensure the return of any uninsured funds.