Now bankrupt cryptocurrency lending firm BlockFi had severe exposure to FTX and Alameda Research, a situation that led to its downfall. Court documents indicate that Zac Prince, CEO of BlockFi, ignored several warnings from his own company’s risk management team about this excessive exposure.
As early as 2021, BlockFi’s risk management team had issued red flags that Alameda’s balance sheet was largely comprised of unlocked FTT tokens and other types of collateral.
Nonetheless, those concerns were brushed aside by Prince, who reportedly encouraged the team to feel comfortable with a borrower of Alameda’s size. In August 2021, BlockFi loaned Alameda Research approximately $217 million.
In January 2022, the risk management team stopped issuing warnings to Prince about the loan to Alameda Research. In contrast, discussions on the subject were held on Slack, where the CEO repeatedly acknowledged BlockFi’s exposure to FTX and Alameda.
However, these warnings were in vain. When BlockFi filed for bankruptcy, it had approximately $1.2 billion in assets tied to Alameda and FTX.
The court documents also indicate that despite BlockFi recalling its loans in June 2022, and Alameda paying off its debt to near zero, BlockFi continued to lend Alameda, this time nearly $900 million, between July and September 2022, mostly secured by FTT.
Following the fall of FTX, BlockFi has suspended withdrawals on November 10, 2022 and said the exposure to FTX and its associated entities was material. However, according to the court filing, BlockFi’s collapse was due to bad business practices and bad decisions long before the Alameda/FTX bankruptcy.
BlockFi, which is not a regulated lending institution, took unnecessary and unreasonable risks, which led to cataclysmic losses. The statement describes BlockFi’s operation as a “flawed business model.”
In response to the allegations, a BlockFi representative responded by saying the company disagreed with the report, accusing it of picking statements at its convenience and failing to provide an objective analysis. According to BlockFi, it was the direct exposure to FTX that caused its bankruptcy.
FTX and other companies, however, have challenged BlockFi’s bankruptcy plans in court, delaying the execution of those plans. BlockFi currently owes between $1 billion and $10 billion to its creditors.
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