BlockFi CEO was aware of FTX’s conditions when lending to it

A recent court report alleges BlockFi CEO Zac Prince dismissed repeated warnings from his risk management team about the shaky financials of major counterparty FTX.

According to the report, Prince pushed to increase lending to FTX and sister entity Alameda Research despite evidence their balance sheets were highly concentrated in FTX’s native token, FTT.

BlockFi credit analysts warned as early as August 2021 that over half of Alameda’s reported assets were in unlocked FTT. They cautioned lending against illiquid FTT collateral, which would likely lose significant value if Alameda or FTX got into financial trouble.

But Prince allegedly dismissed these concerns and urged his team to “get comfortable” with major FTT exposures, seeing it as a growth opportunity. By October 2022, over $1 billion of BlockFi’s collateral was solely in FTT tokens.

Emails cited in the report show Prince approving large FTT-backed loans to Alameda against the advice of his risk management team. When Alameda’s shaky balance sheet was questioned by executives in 2021, Prince allegedly acknowledged the FTT collateral was “worthless” if FTX failed.

Yet Prince continued increasing lending to FTX right until its collapse, despite having access to the same balance sheet that later ignited FTX’s death spiral. The report suggests Prince’s decision to ignore warnings about FTX counterparty risk directly contributed to BlockFi unraveling.

The allegations provide further insight into potential risk management and executive decision-making lapses that may have fueled BlockFi’s downfall. They raise questions about Prince’s justification that market events caused the crypto lender’s bankruptcy.

Furthermore, the report suggests that a significant factor in the firm’s collapse was BlockFi’s “high-yield” interest accounts, which offered customers interest rates of up to 6% on crypto deposits. BlockFi relied on reinvesting customer funds with third parties promising even higher yields to generate these high returns. This led BlockFi to take on increasingly risky counterparties as deposit volumes grew.

Three investments that ruined BlockFi

The report highlights three major failed investments that led to staggering losses for BlockFi:

• Grayscale Bitcoin Trust (GBTC): BlockFi utilized customer bitcoin to invest in GBTC, betting that a persistent premium on the shares would lead to profits. However, when the premium flipped to a discount in early 2021, BlockFi faced over $200 million in losses liquidating the position.
• Three Arrows Capital: This crypto hedge fund collapsed in June 2022 after failed bets on Luna. BlockFi had lent Three Arrows over $1 billion secured by increasingly risky collateral like GBTC. Default led to $85 million in losses for BlockFi.
• Alameda Research/FTX: Starting in 2020, BlockFi issued large loans to Alameda secured by FTX’s illiquid FTT token, despite repeat warnings from its risk management team. This led to FTT exposures exceeding $1 billion before FTX’s collapse, resulting in massive losses.

In the months before bankruptcy, questionable transactions highlighted in the report include liquidating $239 million of customer crypto during market turmoil and purchasing $22 million in D&O insurance shortly before filing.

The Official Committee of Unsecured Creditors commissioned the report and compiled by an independent examiner group. It suggests mismanagement by BlockFi executives and excessive risk-taking were major factors in the crypto lender’s failure, countering initial claims that the company was solely a victim of market conditions. The investigation is ongoing.