BlockFi Review: Where Did Things Go Wrong?

BlockFi was a cryptocurrency-focused wealth generation platform that offered a suite of products, such as the BlockFi credit card, a BlockFi custodial wallet, and a cryptocurrency interest account.

The company initially launched with a cryptocurrency interest account product, offering around 4.5% APY on BTC and up to 9.5% on stablecoins. They put this offering on ice in February 2022. Upon paying $100 million in fines to the SEC and 32 states, BlockFi ceased all BlockFi Interest Account offers to bring its business within the Investment Company Act of 1940. 

As became clear after BlockFi declared bankruptcy in November 2022, BlockFi had embroiled itself in a complicated interdependent financial relationship with now-bankrupt FTX earlier in the year. It was one of many cryptocurrency interest accounts to declare bankrupcy.

BlockFi: A Quick Company Bio

BlockFi was a privately-held NYC-based lending platform founded in 2017.  BlockFi’s flagship product was the BlockFi Interest Account (BIA), which allowed users to earn compound interest on cryptocurrencies such as BTC, ETH, LTC, USDC, USDT, GUSD, and PAXG. 

During the BIA’s operation from 2017 to 2022, halted by the above-mentioned agreement with the SEC, BlockFi kept cryptocurrency deposits secure and consistently generated yield for its depositors, gradually dropping its rates in the process. It also launched a slew of new products, including the BlockFi credit card. 

BlockFi garnered a reputation as one of the leading and most-trusted cryptocurrency interest accounts, particularly, popular among those keen on generating passive income.  

BlockFi deposits weren’t FDIC-insured. These accounts weren’t supposed to be considered savings accounts they were investment accounts with a unique risks.

Why Did BlockFi Go Bankrupt?

Although BlockFi paused all customer deposits into its interest-bearing account, it continued lending operations.

In May 2022, BlockFi loaned $680 million to Alameda Research, FTX’s affiliated hedge fund. 

Following subsequent the cryptocurrency crash, one of BlockFi’s largest borrowers, Three Arrows Capital, collapsed– 3AC had taken a nearly $200 million loss in the Luna debacle. 

BlockFi, in dire straits, managed to obtain a $400 credit facility from FTX in July 2022, which also included an option for FTX to purchase the company in the future for up to $240 million. 

BlockFi soon found itself in a complicated incestuous relationship with being owed money by Alameda Research (FTX’s affiliate hedge fund) and owing FTX $275 million from the July bailout.

BlockFi was also using the FTX exchange to trade cryptocurrencies– and had $355 million of its crypto (i.e., user funds) locked up when FTX filed for bankruptcy in November 2022. 

In November 2022, BlockFi filed bankruptcy, claiming it owes money to over 100,000 creditors; it also sold a portion of its cryptocurrency assets, entering bankruptcy with $256.5 million cash on hand. 

In addition to the over 100,000 users with funds locked in BlockFi, some of BlockFi’s largest creditors include:

• West Realm Shires Inc., (the legal name for FTX US): $275 million unsecured claim,
•  the Securities and Exchange Commission (SEC): $30 million unsecured claim. 
• Ankura Trust Company: a $730 million unsecured claim.

BlockFi and SEC Fines:

The gripe with BlockFi’s Interest Account largely revolved around: 

1. The consensus is that the BIA’s are actually securities, and the company hadn’t registered them.
2. An inadequate disclosure of risk in site and marketing copy
3. BlockFi issuing securities as well as holding more than 40% of its total assets in investment securities (such as loans of cryptocurrency assets to institutional borrowers).

BlockFi’s parent company settled, agreeing to pay a $50 million penalty to the SEC, cease its offers and sales of the unregistered BlockFi Interest Account, and attempt to bring its business within the provisions of the Investment Company Act within 60 days. BlockFi currently owes the SEC $30 million. 

BlockFi paid an additional $50 million in fines to 32 states. 

BlockFi also announced it intends to register the offer and sale of a new lending product under the Securities Act of 1933. The new product has not yet been registered nor disclosed.

The full press release from the SEC can be found here.

The BlockFi Team

BlockFi’s leadership team has decades of experience in the traditional financial services and banking world. The company claims to take a conservative approach to regulation that will position it for sustainable long-term growth and expansion. 

Founder & CEO, Zac Prince has leadership experience at multiple successful tech companies. Prior to starting BlockFi, he led business development teams at Orchard Platform, a broker-dealer and RIA in the online lending sector, and Zibby, an online consumer lender. 

Co-Founder & VP of Operations Flori Marquez has experience managing alternative lending products. She helped build and scale a $125MM portfolio for Bond Street (acquired by Goldman Sachs) as Head of Portfolio Management. She managed all operations, including point of origination, default, and litigation.

How Much Money has BlockFi Raised?

BlockFi raised a total of $508.7M, valuing the young company at $3 billion. BlockFi’s revenue has grown 10x over the past year, putting it on track to reach $100M in revenue over the next year. With over $1.5B in assets on the platform, and a 0% loss rate across its lending portfolio, BlockFi has made a strong case for establishing itself as a dominant entity in the overarching emerging FinTech space.

BlockFi raised its lion’s share of funding in a $350M Series D, led by new investors such as Bain Capital Ventures, Pomp Investments, Tiger Global, and partners of DST Global. In a press release, BlockFi noted it plans to use the inflow of capital to explore further innovation in its product suite, accelerate new market expansion, and potentially fund new acquisition opportunities.

BlockFi raised $50 million in its Series C led by Morgan Creek Digital, with participating investors such as Valar Ventures, Winklevoss Capital, Kenetic Capital, CMT Digital, Castle Island Ventures, SCB 10X,  HashKey, Avon Ventures, Purple Arch Ventures,  Michael Antonov, NBA player Matthew Dellavedova, and two university endowments.

Prior to its recent Series C, BlockFi raised $18.3 million in Series A funding led by the Peter Thiel-backed Valar Ventures with participation from Winklevoss Capital, Galaxy Digital, ConsenSys Ventures, Akuna Capital, Avon Ventures, Susquehanna, CMT Digital, Morgan Creek, and PJC. 

BlockFi has also raised earlier rounds by SoFi and Purple Arch Ventures.  

The team notes that they anticipate raising additional capital in the future to facilitate continued product development and rapid growth.

As of March 2021, the platform has over 265,000 retail and 200,000 institutional clients,  with reported monthly revenue of $50m in 2021, compared to $1.5m monthly revenue in 2020.

How Does BlockFi Make Money?

BlockFi’s former Interest Account was a spread business that makes money by borrowing capital at a certain rate (the interest rates it pays to users) and lends it a higher rate (the interest rates it offers for BTC/ETH/GUSD loans). A BlockFi blog post notes that the company primarily works with institutional counter-parties to offer them liquidity. These borrowers consist of: 

• Traders and investment funds seeking arbitrage trading opportunities in a fragmented marketplace. They borrow cryptocurrency to close mispricing gaps between exchanges or dispersed markets. Margin traders will borrow to fuel their trading strategies. 
• Over-the-counter (OTC) market makers that connect buyers and sellers that prefer not to transact over public exchanges, often at a steep mark-up. These parties need to keep cryptocurrency inventory on hand to meet demand. Since owning the cryptocurrency is very capital intensive and bears the risks of price volatility, OTC market makers will borrow from lenders such as BlockFi to facilitate their needs. 
• Other businesses that need an inventory of cryptocurrency to provide their clients with liquidity. This category includes businesses such as cryptocurrency ATMs that keep the majority of their cryptocurrency assets in cold storage and need some level of liquidity to function on a daily basis. 

Where Did Things Go Wrong for BlockFi?

During the bulk of its operations, BlockFi was regarded as a top-tier product, at least in the cryptocurrency industry; it was considered to be safe, and its executive team pledged to keep user funds safe. 

However, as rubber met the road, BlockFi had no choice but to block all customers from withdrawing their assets. A BlockFi representative went as far as to call BlockFi “the antithesis of FTX,” citing its mature, consistent leadership, expert staff, and proper protocols and procedures, despite their company’s involvement with FTX. 

As of writing, all user deposits are still locked on the platform.

When we originally published this article in 2019, we interviewed a member of the BlockFi team regarding various scenarios regarding the company’s safety and business model. The responses are kept in their original form below. 

What happens if BlockFi gets hacked?: “Gemini is BlockFi’s primary custodian and BlockFi doesn’t hold private keys directly. Gemini keeps the vast majority of its assets in cold storage and is insured by Aon. Gemini is a licensed custodian and regulated by the NYDFS. They recently received SOC2 Type 1 compliance audit from Deloitte for their custody solution. We encourage users to read more about Gemini’s security. “

What happens if a user account is compromised?: “Since inception, BlockFi has not lost any customer funds. In the event that a user’s account is compromised, which our security protocols have caught in the past, we freeze the individual’s account for one week. Then, we conduct a Videoconference with the affected individual to verify their identity. We can then change their email address and password, so they can regain control of their account.” 

What happens if suddenly everyone defaults on their cryptocurrency loans?:  “When we lend crypto assets to generate yield, we have an extremely thorough risk management and credit analysis process. We only primarily lend to large, well-capitalized, institutional borrowers, or to counter-parties willing to post collateral and provide the ability to margin call them on a 24/7 basis.”  

“What that means is, if we are lending $1M worth of BTC to Firm XYZ, Firm XYZ collateralizes the loan (typically ~120%) by giving us ~$1.2M USD. If the loan were to then enter margin call and the borrower was unable to provide additional collateral (default), we would use their USD collateral to buy crypto.” 

“We have actively lent since January of 2018, including throughout multiple periods of high volatility, without any losses across our entire lending portfolio. BlockFi is bound by NDA’s to discuss terms of specific borrowers/rates.”

How do I get in contact with BlockFi Customer Service?

If you’d like to contact customer service, you can reach them at [email protected]. 

Is BlockFi insured?

Is BlockFi FDIC insured? No. BlockFi claimed to use partner company Gemini as its custodial service, and Gemini does have its own insurance for its deposits. When said catastrophic even occurred, zero customer funds were reimbursed through any insurance.

Although the BlockFi Interest Account only exists for prior customers, who even then aren’t able to add more funds, there are some lessons that can be gained from the evolving cryptocurrency interest account niche. Excerpts are from our interview with the BlockFi team, prior to the SEC event mentioned above.

How is offering a 4.5% on BTC interest rate sustainable? 

“The interest we are able to pay is based on the yield that we are able to generate from lending, which directly correlates to the market demand in the space (I.e. what rate institutions are willing to pay to borrow specific crypto assets, as it varies from asset to asset). We are bound by NDAs to discuss specifics (institutions, specific rates, etc).” 

How about the 9% interest rate on Stablecoins like GUSD? 

“We are able to use stablecoin deposits to fund our consumer loans (average APR is ~10-13%) so we can afford to pay higher interest to GUSD / Stablecoin depositors.”

The BlockFi interest rate is subject to change on a monthly basis, could you explain why this is?

“Upcoming changes are announced typically 1-2  weeks prior to a new month, giving clients ample notice and time to prepare. The interest we are able to pay is a function of the borrowing demand. 

You can read more about why our rates are variable and how the lending market works here and here.” 

What happens in the case of a BTC/ETH fork? Will a user’s balance be credited with the forked coin as well? 

“Gemini is our custodian and has all of the information about what happens in the case of a forked network. Please refer to their user agreement here where you can read more about that.” 

Final Thoughts: What’s Next for BlockFi

In our initial review, all of our indicators (history, team, communication with support, and business model evaluation) pointed to BlockFi being legit– meaning it was a legitimate company and not a scam. However, despite not being an outright scam, its users find themselves at a similar conclusion– with their funds out of reach. Some percentage of fund recovery is likely, but it has still been a disheartening endeavor for many users.

Any time your cryptocurrency leaves your hard cold wallets, it’s exposed to a higher degree of risk. If BlockFi or Gemini were to experience some catastrophic event, your cryptocurrency would be at risk– and as evidenced above, these things can happen to even the most seemingly legitimate companies.

Editor’s Note/disclaimers: The above article isn’t investment advice. This review is written for educational and entertainment purposes. Do not invest anything you cannot afford to lose, and speak with a licensed financial advisor if you’re interested in cryptocurrency.