- BlockFi’s unsecured creditors’ committee has accused the platform’s management of ignoring red flags about the risks associated with lending assets to Alameda.
- The platform’s CEO is said to have ignored the group’s concerns about a $217 million loan to Alameda in August 2021.
- BlockFi had roughly $1.2 billion in assets tied to FTX and Alameda Research when the firm filed for bankruptcy in November 2022.
A preceding report dubbed ‘’Why did BlockFi Fail?’’ has been submitted to the United States Bankruptcy Court for the District of New Jersey. The report has shed light on the reasons behind the failure of BlockFi, a prominent crypto lending firm.
According to a July 14 filing with the United States Bankruptcy Court for the District of New Jersey by the unsecured creditors’ committee, BlockFi’s risk management team had raised concerns about the high risks associated with lending assets to Alameda.
The report notably provides a timeline of events leading up to BlockFi’s collapse and discusses the key individuals and entities involved in the case.
Zac Prince, the CEO of BlockFi, allegedly disregarded recommendations from the company’s risk management team over lending assets to Alameda Research. The team had reported on the “high risks” associated with lending assets to Alameda, but Prince allegedly dismissed these concerns.
BlockFi Management ‘’Ignored The Red Flags’’
By August 2021, BlockFi had lent Alameda $217 million, despite the risk management team’s warnings about potential risks if the FTX Token (FTT) used to secure the loans needed to be liquidated.
The filing stated:
‘’As early as August 2021, BlockFi’s risk management team was advised that Alameda’s balance sheet was primarily comprised of ‘~7bb unlocked FTT and 11bb total including locked tokens based on unaudited financials. This set off alarms at BlockFi.’’
The filing added that Mr. Prince dismissed the concerns, urging the risk team to learn to ‘get comfortable’ with Alameda, being a three arrows size borrower, just with FTT and other collateral types instead of GBTC shares.
After January last year, the risk management team shunned issuing memos to BlockFi CEO on the potential risks of giving loans to Alameda Research. However, the team moved its discussions to “offline meetings and Slack,” where the CEO occasionally acknowledged the exposure of drained millions.
Nonetheless, BlockFi had roughly $1.2 billion in assets tied to FTX and Alameda Research when the firm filed for bankruptcy in November 2022. At the time of its Chapter 11 filing, BlockFi admitted it had “significant exposure” to FTX and its associated entities. FTX US received a $400 million credit line from BlockFi in July 2022, furthering financial ties between the two firms amid a crypto turmoil.
The report noted that:
‘’BlockFi recalled its loans from Alameda in June 2022, and Alameda repaid its outstanding balance to almost zero. BlockFi then could have walked away from the relationship. Instead, it re-lent Alameda nearly $900 million (between July and September 2022), almost exclusively collateralized by FTT.’’
The report further suggests that while Alameda/FTX’s downfall may have triggered BlockFi’s downfall, BlockFi’s demise was rooted in business practices and decisions preceding Alameda/FTX’s bankruptcy filing.
The Firm Disagrees With The Report
On the other hand, the BlockFi spokesperson has differed from the report. The platform has alleged that the committee behind the report “cherry-picks statements out of context, errs on other matters, and does not deliver the objective analysis promised.’’
The report’s findings highlight the importance of robust risk management and the potential consequences of ignoring such systems in the rapidly evolving crypto ecosystem.
