Eco Said It Was Lending To Fidelity & Goldman. Really, User Funds Went To Risky Crypto Lenders & DeFi Protocols.
a16z- and Thiel-Backed Startup's Future Uncertain As It Loses Bank Partner, Pays User Interest With Own Funds
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Eco Said It Was Lending To Fidelity And Goldman. Really, User Funds Went To Risky Crypto Lenders And DeFi Protocols.
Key points:
Eco had a policy of telling users it generated yield by lending USDC to “tier 1 institutions” like “Fidelity and Goldman”
In fact, Eco worked with BlockFi and later Wyre, meaning customer funds likely went to high-risk entities like FTX, Alameda, and Genesis (all now bankrupt), as well as DeFi protocols like MakerDAO and Compound
Circumstances around the failed acquisition of Wyre — which shares an investor with Eco — by one-click checkout startup Bolt — which holds equity in and shares a cofounder with Eco — suggest more was happening than meets the eye
Signature Bank, one of Eco’s bank partners it uses to accept users’ direct deposits, is offboarding the company, effective at the end of March
Eco is currently paying interest on user balances using its own funds
As the crypto world continues to navigate the fallout from the collapse of, arguably, one of the largest and most irrational bubbles in recent memory, more companies’ and their executives’ questionable behavior is coming to light.
One company that we’ve looked at previously, Eco, raised eyebrows from many in “tradfi,” including me, for its positioning of FDIC insurance as a “bug” of sorts rather than a feature — in a since-deleted blog post, the company argued “FDIC insurance doesn’t matter” to 95% of people.
Eco is backed by a who’s who of venture capital, including: Andreessen Horowitz (better known as a16z), Peter Thiel’s Founders Fund, Pantera Capital, Lightspeed Venture Partners, L Catterton, Activant, Coinbase Ventures, and even Uber cofounder Garrett Camp, who owned the eco.com domain before investing in and transferring it to the company.
At the same time Eco argued FDIC insurance “didn’t matter,” it was happy to compare itself to insured banking institutions like Goldman Sachs, Bank of America, and Wells Fargo.
But the deception at Eco went far deeper than misleading comparisons and irresponsible claims about deposit insurance.
Eco appears to have engaged in a pattern of intentionally deceptive behavior, a review of hundreds of pages of internal company documents, including chat logs, product documentation, customer onboarding playbooks, call recordings, and transcripts of conversations with actual customers reveals here for the first time.
Some documentation used in this piece has been partially redacted to protect the identity and privacy of lower-level employees and end users.
Eco Execs: Offering 5% APY “Sets Off Alarm Bells” and “Sounds Like A Scam”
While the 2.5-5% interest rate (later referred to as “rewards APY”) Eco promises users in return for depositing their paycheck or parking their savings in USDC — without the “psychological safety blanket” of FDIC insurance — might seem plausible in today’s interest rate environment, when the team was first developing its product and go-to-market strategy in 2020, a 5% return sounded too good to be true.
At the time, the federal funds rate was 0% and banks were paying next to nothing on deposits.
The leadership team at Eco and at least one key VC investor were acutely aware that an offer of rates at 3%+ “sets off alarm bells” with prospective customers.
In fact, Eco co-founders J. Henry Ault and Ryne Saxe (a lawyer by training) and Eco investor, Joey Krug, co-chief investment officer at Pantera Capital, debated at length what a reasonable-sounding rate would be and how to position it, initially settling on a base rate of 3% (later lowered to 2.5%) with users able to earn more by referring others.
Pantera Capital co-CIO Krug argued that “5% sounds like a scam,” but that “3% wont [sic] sound like a scam to most people.”
To explain to skeptical users how Eco could pay rates as high as 5% APY, Eco began iterating on what company leadership referred to internally as “the Goldman and Fidelity angle” — something it would incorporate into multiple versions of customer onboarding “playbooks” and frequently lean on in conversations when users questioned where yield came from or if it was safe and sustainable.
In reality, as Eco was preparing to go to market, the plan was to convert users’ funds into USDC, pool them, and park them at BlockFi. Eco would earn 8.6% on those funds, pass along 2.5-5% to its users, and keep the rest for itself.
Eco’s Test Users: Its Cofounder’s Employees
To recruit its initial users, the company leaned on another Eco cofounder, Ryan Breslow — better known as the controversial founder of one-click checkout startup Bolt, which also holds an ownership stake in Eco.
Eco staffers conducted market research interviews with Bolt employees to develop user personas and refine the product and its messaging.
Below, you hear a short snippet of a call that took place in 2020 between a Bolt employee (first speaker) and Eco cofounder Henry Ault (second speaker), with Ault explaining that “with Coinbase” (referring to Coinbase’s USDC partnership with Circle) funds are “FDIC insured” and “just as safe” as money in a Chase or Bank of America account:
Funds held as USDC aren’t actually FDIC insured and Eco’s current user agreement warns that “Eco does not control the issuance, redemption, or backing of USDC and cannot guarantee that 1 USDC will always be exchangeable for 1 U.S. Dollar.”
Over time, Eco adjusted its messaging regarding deposit insurance, telling users Eco’s offering was constructed in such a way that FDIC insurance wasn’t needed and that, in fact, most consumers “don’t actually need” FDIC insurance — even publishing a blog post on the topic, which has since been scrubbed from its site.
Eco’s initial go-to-market strategy focused on leveraging the employees of Eco cofounder Breslow’s other company, Bolt:
Eco’s presentation for Bolt employees illustrated users receiving 2.5% “back to you” based on a “bank” making loans to a third party:
Though this was flagged internally is inaccurate — the interest would come from BlockFi, not a bank — Ault, the Eco cofounder, made the call not remove it:
From BlockFi To Wyre
Although this was never disclosed to end users, Eco appears to have used BlockFi to generate yield from the time it launched around July, 2020, until at least late 2020, when it began to transition to Wyre’s recently launched Wyre Savings API (subsequently renamed as Wyre+ Rewards API).
Per Wyre’s blog post announcing the capability, the API would enable third-parties, like Eco, to create and manage a sub-wallet for their end users.
At the time, Wyre stated publicly that it was “working with both CeFI and DeFi partners” to generate “attractive rewards rates” on Bitcoin, Ether, DAI, and USDC.
While there were legitimate benefits to transitioning to Wyre, like being able to segment customer funds in individual sub-wallets, there are other links between Wyre, Eco, Bolt, and their investors that may have influenced this and subsequent developments between the parties — including, potentially, Bolt’s ultimately-abandoned $1.5 billion acquisition of Wyre.
“The Playbooks": Describe Banks As Risky, FDIC Insurance As A “Psychological Safety Blanket”
During its time using BlockFi to generate yield and as it transitioned to Wyre, Eco was continuing to onboard customers and refine its pitch.
As part of its strategy to overcome potential users’ skepticism, Eco held onboarding conversations with new users via Discord and similar chat-based channels.
The company developed and iterated through numerous versions of a “playbook” to guide the conversations and answer common questions — including about FDIC insurance and how it could afford to pay 2.5-5% APY at a time when interest rates were near zero.
Eco’s internal documentation and records of user onboarding chats demonstrate the company repeatedly making the claim that it didn’t “lend to DeFi,” but rather generated yield by lending funds on a short-term basis to “Tier 1 Financial Institutions” like “Fidelity and Goldman.”
The playbooks and chat transcripts demonstrate an intentional strategy of trying to make Eco palatable for “mainstream” consumers by minimizing any references to crypto while, simultaneously, making misleading claims designed to paint traditional banks as “risky.”
Here, you see one of many examples of an Eco staffer deploying key talking points from the “playbook” in an onboarding conversation — describing banks as risky and FDIC insurance as unnecessary for Eco, as it lends USDC to “too big to fail massive institutions like Fidelity.”
The goal of the conversations, some of which leverage high-pressure sales tactics, was to get users comfortable using Eco for day-to-day spending and savings.
Below, you hear an Eco growth manager giving advice on managing user onboarding conversations, including on handling user queries about FDIC insurance:
Eco staff conducting these onboarding chats encouraged users to move their payroll direct deposit and as much as tens of thousands in savings to the platform with promises of safe, outsized returns.
When asked if Eco uses a “playbook” to guide customer conversations, including claims it “never lends to DeFi,” but only institutions like Fidelity and Goldman, an Eco spokesperson didn’t dispute those claims, saying only:
“Eco’s guidelines for customer onboardings today makes specific note that user funds are not lent out at all. In the past, when users could participate in Wyre’s rewards program, the guidelines described how that process worked. These guidelines are regularly updated and improved in the interest of increasing clarity and accuracy, including addressing common questions like the exact roles of Eco versus our partners and the counterparties involved.”
Only Eco Wasn’t Lending to “Tier 1 Financial Institutions Like Fidelity and Goldman”
The only problem is, it doesn’t appear that Eco was ever actually generating yield by lending customer funds to “institutions like Fidelity and Goldman.”
When leveraging BlockFi, Eco doesn’t even seem to have been aware of to whom BlockFi was lending funds, beyond what the crypto lender said publicly at the time, which was limited to saying, “We generate interest rates for you by lending crypto to institutional investors.”
We now know that BlockFi was really lending customer funds to entities like crypto exchange FTX, FTX’s associated crypto trading firm Alameda Research, and crypto hedge fund Three Arrows Capital, all of which are now bankrupt.
When asked if it ever placed users’ funds with BlockFi, an Eco spokesperson said in part: “Eco did not place user funds with BlockFi — in fact, Eco did not place user funds anywhere. Eco users have always directed their funds into accounts at specific regulated partners.”
This claim by Eco is inconsistent with numerous internal conversations and documents reviewed for this story.
Wyre was somewhat more transparent — at the time it launched its Savings API, it acknowledged it generated yield by shifting user funds between defi protocols MakerDAO and Compound and two unnamed centralized crypto lenders, one of which seems to have been Genesis.
And while, internally, Eco acknowledged how user funds were being used, in its onboarding conversations, it continued to tell users that yield came from safe, short-term loans to “tier 1 institutions” like “Fidelity and Goldman.”
When faced with a question from an Eco employee about yield generation and the level of risk, Andy Bromberg, who had joined Eco as CEO in October, 2020, told the employee that Wyre lends “to institutions like Fidelity,” but “more often large trading desks like Genesis.”
Eco and Wyre were comfortable putting user funds with Genesis because it was an “extremely good” creditor, CEO Bromberg says. Genesis ultimately filed for bankruptcy in January, 2023.
Internally, how Wyre generated yield was known and discussed. Later, around the time of transition from Wyre to Prime Trust, Eco’s Head of Finance Jeff Caron summarizes in response to internal discussion about how to answer a customer’s question:
When asked how user funds held with Wyre were deployed to generate yield, an Eco spokesperson said:
“Our understanding from discussions with Wyre was that Wyre was lending to established blue chip counterparties and not placing funds in DeFi products. Once again, Eco itself did not do anything with user funds — it was through the users’ direct relationship with Wyre that funds were lent. And in early 2022, facing a lack of transparency from Wyre as well as a shifting market environment, Eco made the decision to cease its relationship with Wyre and support customers in moving their funds to alternative partners where the assets were not lent out.”
This is inconsistent with how Eco’s relationship with Wyre operated; Eco retained a portion of interest earned on user funds and passed the rest along — users’ relationship with Wyre was not “direct.” Eco’s claim is further contradicted by internal conversations documenting the actual product mechanics, which included both “CeFi” and “DeFi” partners, as seen above.
Further, Goldman and Fidelity were almost certainly not the “institutional” investors BlockFi was lending to nor one of the “CeFi” partnerships Wyre leveraged to generate yield.
While Goldman Sachs does have a “crypto trading desk,” it didn’t launch until May 2021 — significantly after Eco started making the claim of lending funds to the firm.
Goldman has only traded in cash-settled crypto options. Goldman has never traded “physical” (spot) cryptocurrencies nor borrowed USDC — in fact, given the current regulatory climate Goldman faces as a bank holding company, it would be virtually impossible for it to do so.
Asked about the claims Eco made to its customers, a Goldman spokesperson said: “We have never facilitated spot trading in Bitcoin or Ether, or borrowed USDC from BlockFi, Wyre or any other company. Any suggestion that we have done so is completely inaccurate.”
For its part, Fidelity has pushed more aggressively into crypto, offering both institutional and retail capabilities.
But while Fidelity offers digital asset custody, it merely facilitates trading execution for Bitcoin and Ether by connecting institutional clients with “multi-venue liquidity” — specifically, via crypto platform Nexo.
Fidelity itself doesn’t run a “trading desk,” but relies on its partnership with Nexo, making it extremely unlikely that Fidelity would be borrowing USDC to use for settlement in a crypto trading operation, as Eco repeatedly told customers.
(Fidelity didn’t respond to multiple requests for comment for this story.)
What Really Transpired Between Eco, Bolt, And Wyre?
Eco had begun the plan to transition customer funds from BlockFi to Wyre in late 2020, but, by early 2022, the company made another abrupt shift.
The company informed users on March 21, 2022, that, on April 18th their funds would be transitioned out of Wyre, where they were held as USDC, and to Prime Trust, where they would be held as “fiat” US dollars.
The entirety of the circumstances surrounding this decision aren’t clear.
A month prior to communicating the change to users, BlockFi reached a settlement with the SEC on its “BlockFi Interest Account,” which Eco acknowledged could necessitate a change to its business model.
While, at this point, Eco had already transitioned off BlockFi to Wyre, the settlement seems to have raised concerns about the longer-term viability of crypto yield products, with state securities regulators and the SEC taking the position that they are securities and need to be registered and regulated as such.
While the BlockFi talking point was used to explain the move internally and if customers asked, other factors seem to have been in play in driving the abrupt shift off Wyre and out of USDC.
The BlockFi SEC settlement was hardly the only trouble brewing in crypto markets in early 2022. At the start of the year, concerns were already swirling about the viability of TerraLuna and its “algorithmic” stablecoin, UST.
By early March, 2022, accusations that LUNA/UST were a “ponzi scheme” were accelerating, with crypto traders making multi-million dollar bets that LUNA’s price would collapse.
On May 7th, significant funds exited UST, which “de-pegged” to $0.985; by May 9th, UST — which was supposed to be pegged to the dollar — was trading at $0.35 and had entered a death spiral. By May 12th, the Terra blockchain was halted and UST was effectively worthless.
Did Eco Investors — A Group That Includes Crypto Heavyweights Like a16z, Pantera & Founders Found — Warn It Trouble Was Brewing?
Eco’s investors were and are extremely connected in the crypto ecosystem, given the number of companies in which they’ve invested. Pantera Capital, an Eco and Wyre investor, also invested in Coinbase and Circle, which partner on USDC — the stablecoin Eco uses.
a16z is a prolific crypto company investor, including in Coinbase. And Founders Fund has held large positions directly in Bitcoin, as well as investing in crypto firms like Paxos.
One wonders if Eco knew something the rest of the market didn’t — it had been making plans to transition out of USDC since sometime in mid-March, if not earlier, based on the timing of its email to users.
Founders Fund, cofounded by Peter Thiel, also benefited from great timing.
The fund, which started investing in crypto in 2014, wound down almost all of its positions by the end of March, 2022 — netting Founder Fund gains of about $1.8 billion in the process, shortly before crypto markets entered a prolonged downward slide.
Pantera Capital had great timing as well. The fund, a major investor in the creator of TerraLuna and UST, cashed out 80% of its investments before the collapse.
After Eco informed users of the planned transition from USDC at Wyre to US dollars at Prime Trust, but before it was actually executed, Bolt — run by Eco cofounder Ryan Breslow — announced it would acquire Wyre — in which Pantera Capital was also an investor — for $1.5 billion.
Had the deal come to pass, it would’ve been the largest non-SPAC exit for a crypto company. Wyre’s previous valuation isn’t known, but the company had raised just $29.1 million in previous funding, according to Crunchbase data.
Bolt’s intention to acquire Wyre was announced publicly on April 7th, 2022.
Eco didn’t complete moving customer funds off of Wyre and into Prime Trust until over a month later, on May 10th — just as TerraLuna and UST were entering a death spiral.
Eco eventually onboarded Zero Hash as its new crypto custodian. The company was then able to convert user funds back into USDC stored with Zero Hash on or around October 24, 2022.
It seems unlikely that Eco, whose main features and positioning revolve around crypto, would have abruptly pulled users’ funds out of USDC and off Wyre without a replacement custodian in place — unless it felt it had to.
Even more unlikely, is that, while dropping Wyre as a mission-critical vendor, Eco cofounder and Bolt founder/CEO Ryan Breslow would propose acquiring Wyre for $1.5 billion.
Ultimately, news broke that Bolt and Wyre’s deal wasn’t happening on September 9, 2022, for reasons that are still not entirely clear.
About four months after the deal was called off, in early January, 2023, Wyre had to limit customer withdrawals amid the ongoing crypto market meltdown and was rumored to be shutting down, before ultimately being rescued by a still-unknown “strategic investor.”
Without Crypto Yield And Down A Bank Partner, Eco’s Purpose, Future Increasingly Uncertain
Presently, either because of the heightened SEC scrutiny of crypto yield products, the crypto market rout in the wake of TerraLuna and FTX’s collapse, or both, user funds are just sitting at Zero Hash, earning nothing.
But Eco is still offering that 2.5-5% APY. Now, instead of generating that return from users’ funds, Eco is footing the bill for the interest payments out of its own treasury.
Eco, in turn, is defraying this expense by lending its own funds in crypto markets, according to an FAQ on its website.
With its base rate of 2.5% APY, Eco is now offering substantially less than the banks it is seeking to disrupt, with some traditional banks offering rates as high as 4.40% APY.
Regulatory scrutiny on crypto has only increased in recent months. With the SEC cracking down on “staking,” a yield generating practice sometimes compared to bank deposits, and arguing that stablecoins themselves could be treated as securities.
Banking regulators have ramped up scrutiny on institutions they supervise that provide services to crypto companies, including recently highlighting potential liquidity risks from relying on deposits associated with crypto.
And in the latest blow, one of Eco’s partner banks, Signature, is offboarding the startup as it reduces its exposure to the crypto ecosystem. Eco informed users in an email that deposits via Signature Bank would no longer be supported after March 31, 2023, and instructed them to “relink” their paycheck deposit. Eco does still seem to be working with Piermont Bank and Prime Trust, per its current user agreement.
All of which casts significant doubt on Eco’s initial promise to users — however misleading it may have been — and its route forward.
Eco presumably can’t or won’t want to significantly scale its user and deposit growth as long as it is footing the bill for users’ interest payments; but then again, if it’s paying below-market rates, it may not have that problem, as it’s not clear why users would want to sign up in the first place.
Per internal chats where CEO Andy Bromberg addressed questions about the sustainability of footing the bill for interest payments, the company seems to have pinned its hopes on launching its own native token of sorts, ECOx, which it could leverage as part of its interest/rewards scheme.
But with increasing attention from regulators — and increasing traditional interest rates — it’s not clear that, even if Eco can offer such a token, that users will still want it.
Bolt declined multiple requests for comment on this story.
Wyre and Pantera Capital didn’t respond to requests for comment.
Corrections & amplifications: an earlier version of this story incorrectly stated that Pantera Capital was an investor in Bolt; it should have read that Pantera is an investor in Wyre. Founders Fund exited its crypto positions by March 2022 (not March 2020, as stated in an earlier version.) These errors have been corrected in the web version.
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