Defunct crypto lender BlockFi continued to keep substantial amounts of its client funds at FTX even though its leadership saw the exchange’s highly questionable balance sheet well before its demise, FTX creditors claim.
In a May court filing, BlockFi’s Committee of Unsecured Creditors said that the company had known of FTX’s hedge fund Alameda Research’s overexposure to FTT as early as August 2021.
Despite this, BlockFi CEO Zac Prince insisted on continuing to do business with the trading desk, granting it multiple billion-dollar loans largely collateralized by the token.
“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. It’s the largest, clearest growth opportunity we have,’” the creditors stated.
On July 10, BlockFi asserted that its management never misused client funds, nor directed them without understanding the appropriate risk.
Formerly one of the largest hedge funds in crypto, Three Arrows Capital (3AC) fell apart in June 2022 due to its overexposure to Terra (LUNA), which entered a hyperinflationary death spiral a month prior. The crypto market tanked fast, prompting BlockFi to recall its loans from Alameda.
While Alameda had repaid its initial outstanding debt to nearly zero, BlockFi simply re-loaned $900 million to the company between July and September 2022, backed almost solely by FTT. This is roughly the same loan exposure BlockFi was reported to have to Alameda as revealed in bankruptcy proceedings this past January.
“BlockFi’s demise was rooted in business practices and decisions well preceding Alameda/FTX’s bankruptcy filing,” the creditors wrote.
BlockFi’s bankruptcy followed mere days later, and FTX and Alameda Research entered insolvency in November 2022. Earlier that month, a leaked version of Alameda’s balance sheet had emerged showing a large share of its assets included $5 billion worth of FTT.
According to CoinGecko, FTT’s reported market cap at the time was only $3.5 billion, signaling that Alameda’s FTT stash was not realistically tradeable.
The FTX creditors claimed that BlockFi discussions of Alameda loan-related risks grew less serious after January 2022. The risk management team stopped writing credit memos on the subject, while Prince only “occasionally acknowledged the Company’s significant exposure to Alameda/FTX.”
The committee demanded that creditor assets be liquidated immediately by BlockFi, rather than continuing to pay costly legal fees.