BlockFi Inc. executives dismissed repeated warnings from its risk management team about not issuing substantial loans to Sam Bankman-Fried’s Alameda Research that were collateralized with digital tokens created by FTX, BlockFi creditors allege in a newly unsealed report.
(Bloomberg) — BlockFi Inc. executives dismissed repeated warnings from its risk management team about not issuing substantial loans to Sam Bankman-Fried’s Alameda Research that were collateralized with digital tokens created by FTX, BlockFi creditors allege in a newly unsealed report.
The report, prepared by a committee representing BlockFi unsecured creditors, blames the crypto lender’s failure on missteps made by Chief Executive Officer Zac Prince and other senior managers. The creditors’ findings were made public Friday, days after BlockFi released its own investigation contending Prince and other executives had little reason to worry about lending to Alameda before Bankman-Fried’s platform collapsed amid allegations of fraud.
The committee said as early as August 2021, BlockFi had a copy of an Alameda balance sheet showing the trading firm relied substantially upon FTT, a digital token created by FTX. Alameda’s over-reliance on FTT “set off alarms at BlockFi,” the committee said, but those concerns were dismissed by Prince. The report quotes Prince saying in an email that Alameda represented “the largest/clearest growth opportunity we have.”
The FTT token played a major role in FTX’s failure. In early November, industry publication Coindesk reported on the same balance sheet BlockFi had, triggering a public run on FTX that forced Bankman-Fried’s platform into bankruptcy within days, according to the committee’s report.
Aside from allegedly dismissing red flags from FTX, the committee claims BlockFi’s business was “fundamentally flawed” because it required riskier investment counterparties to deliver high customer returns. That meant BlockFi could only do business with a relatively small number of firms, like Alameda, capable of delivering high enough returns to pass on to customers, including failed crypto hedge fund Three Arrows Capital Ltd. and a Bitcoin trust launched by Grayscale Investments, the committee said.
Prince’s lawyers didn’t return a message seeking comment and a BlockFi spokesman referred to the company’s earlier investigation. BlockFi disputes the committee’s conclusions, which the company described as misleading, and denies Prince or other executives ignored warnings about Alameda and FTX. Criticisms about BlockFi’s business could be leveled against any lending business, the company said.
FTX Concerns
BlockFi said executives performed reasonable due diligence before entering into transactions with Alameda and implemented checks on Prince’s decision-making authority. The crypto lender said management supported the transactions in part because Alameda quickly returned $1 billion in loans last year, before FTX collapsed. The company is seeking to settle allegations against Prince and other BlockFi executives in exchange for their help in valuable litigation involving FTX and other firms it did business with.
The committee’s report said some BlockFi executives were concerned about FTX. A year before Bankman-Fried’s platform unraveled, BlockFi Co-Founder and Chief Operating Officer Flori Marquez said to Prince in a series of Slack messages that using FTT as collateral “just sounds sketchy” and asked about associated risks.
Prince wrote “if FTX went down, FTT was going down with it.”
“That’s my concern,” Marquez responded.
“and we would be sitting on a pile of worthless FTT in our fireblocks wallet,” Prince said.
Lawyers for Marquez didn’t return a message seeking comment. BlockFi said in its earlier report that the committee mischaracterized the Slack exchange. Prince wasn’t discussing the value of FTT, the company said, but instead discussing the risks and benefits of taking the tokens as collateral and staking them on FTX’s platform for additional yield. He was expressing that if Bankman-Fried’s platform went down, it wouldn’t matter where the FTT is custodied, according to BlockFi’s lawyers.
BlockFi filed for Chapter 11 protection in late November and is planning to liquidate in bankruptcy in an effort to repay customers as much as possible.
The case is BlockFi Inc., 22-19361, US Bankruptcy Court for the District of New Jersey (Trenton).
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