Zac Prince, the CEO of bankrupt cryptocurrency lending firm BlockFi, allegedly disregarded recommendations from the company’s risk management team over lending assets to Alameda Research.
According to a July 14 filing with United States Bankruptcy Court for the District of New Jersey by the unsecured creditors’ committee, BlockFi’s risk management team reported on the “high risks” associated with lending assets to Alameda. Prince allegedly dismissed concerns from the team on BlockFi lending Alameda $217 million by August 2021. The team suggested there could be risks should the FTX Tokens (FTT) used to secure the loans need to be liquidated.
“As early as August 2021, BlockFi’s risk management team was advised that Alameda’s balance sheet was largely comprised of ‘~7bb unlocked FTT, and 11bb total including locked tokens based on unaudited financials,’” said the filing. “This set off alarms at BlockFi. 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 2022, the risk management team stopped issuing memos to Prince on the potential risks of giving loans to Alameda, moving discussions to “offline meetings and Slack”, where the CEO occasionally acknowledged the exposure. BlockFi had roughly $1.2 billion in assets tied to FTX and Alameda when the firm declared bankruptcy.
— BlockFi (@BlockFi) November 11, 2022
At the time of its Chapter 11 filing in November 2022, BlockFi said 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 winter.
“BlockFi recalled its loans from Alameda [in June 2022], and Alameda repaid its outstanding balance to almost zero,” said the report. “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 filing added:
“It may be true that Alameda/FTX’s downfall triggered BlockFi’s downfall, but BlockFi’s demise was rooted in business practices and decisions well preceding Alameda/FTX’s bankruptcy filing.”
In a statement to Cointelegraph, a BlockFi spokesperson said the firm disagreed with the report. The firm alleged in a separate court filing the committee behind the report “cherry-picks statements out of context, errs on other matters, and does not deliver the objective analysis promised.”
BlockFi directly cited exposure to FTX in the reasons for its bankruptcy filing. FTX’s practice of collateralized loans based on FTT tokens left many firms holding the bag after the price of the token dropped from more than $25 to under $2 amid the Chapter 11 filing and reported liquidity issues.