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Creditors allege BlockFi CEO knew about FTX’s shaky balance sheet before collapse

FTX collectors declare that dormant crypto lender BlockFi continues to carry substantial quantities of its buyer funds on FTX, though its management has noticed the trade’s extremely questionable stability sheet.

In a courtroom submitting in Could, BlockFi’s committee of unsecured collectors stated the corporate was conscious of FTX’s extreme publicity to FTX’s hedge fund Alameda Analysis as early as August 2021.

Regardless of this, Blockfi CEO Zack Prince insisted on persevering with to do enterprise with the buying and selling desk, giving it a multi-billion greenback mortgage largely collateralized by the token.

“The Prince dismissed considerations, urging the chance staff to study to be snug (with Alameda) being a Three Arrows-shaped borrower, with FTT and different collateral varieties as a substitute of GBTC shares. “That is the biggest, clearest progress alternative we’ve,” the lenders stated.

On July 10, BlockFi claimed that its administration by no means misused buyer funds, nor directed them with out correctly understanding the dangers.

Previously one of many largest hedge funds in crypto, Three Arrows Capital (3AC) broke down in June 2022 resulting from extreme publicity to Terra (LUNA), which entered a hyperinflationary demise spiral a month in the past. The crypto market plummeted, forcing BlockFi to withdraw its loans from Alameda.

Whereas Almeida pared its preliminary excellent debt to nearly zero, BlockFi re-loaned $900 million to the corporate between July and September 2022, nearly solely backed by FTT. That is roughly the identical mortgage publicity that BlockFi has given to Almeida, as revealed in chapter proceedings final January.

“BlockFi’s termination was rooted in enterprise practices and selections lengthy earlier than Alameda/FTX’s chapter submitting,” the collectors wrote.

BlockFi’s chapter adopted a couple of days later, and FTX and Alameda Analysis entered chapter in November 2022. Earlier that month, a leaked model of Alameda’s stability sheet surfaced that confirmed a considerable portion of its property consisted of $5 billion price of FTT.

In response to CoinGecko, FTT’s reported market cap on the time was solely $3.5 billion, indicating that Alameda’s FTT reserves weren’t realistically tradable.

FTX collectors declare that after January 2022, the BlockFi dialogue of dangers associated to the Alameda mortgage grew to become much less severe. The danger administration staff stopped writing credit score memos on the topic, whereas Prince solely “often acknowledged the corporate’s vital publicity to Alameda/FTX.”

The committee demanded that the creditor’s property be instantly liquidated by BlockFi, as a substitute of constant to pay expensive authorized charges.

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