BlockFi's Collapse Tied to Ignored Risks with FTX and Alameda Research

A preliminary report titled "Why Did BlockFi Fail?" submitted to the United States Bankruptcy Court for the District of New Jersey on July 14, 2023, has shed light on the reasons behind the failure of BlockFi, a prominent crypto lending firm. The report was filed by the Official Committee of Unsecured Creditors and involves several entities associated with BlockFi.

According to the report, BlockFi's failure can be attributed to fundamentally flawed business models, unreasonable risk-taking, and ignored concerns from the management team. The document also provides a timeline of events leading up to BlockFi's collapse and discusses the key individuals and entities involved in the case.

Zac Prince, the CEO of BlockFi, allegedly disregarded recommendations from the company’s risk management team over lending assets to Alameda Research. The risk management team had reported on the “high risks” associated with lending assets to Alameda, but Prince allegedly dismissed these concerns. By August 2021, BlockFi had lent Alameda $217 million, despite the risk management team's warnings about potential risks if the FTX Token (FTT) used to secure the loans needed to be liquidated.

The report also reveals that BlockFi had roughly $1.2 billion in assets tied to FTX and Alameda Research when the firm filed for bankruptcy in November 2022. At the time of its Chapter 11 filing, BlockFi admitted it had “significant exposure” to FTX and its associated entities. FTX US had received a $400 million credit line from BlockFi in July 2022, furthering financial ties between the two firms amid a crypto winter.

The report suggests that while Alameda/FTX’s downfall may have triggered BlockFi’s downfall, BlockFi’s demise was rooted in business practices and decisions well preceding Alameda/FTX’s bankruptcy filing.

In response to the report, a BlockFi spokesperson said the firm disagreed with the report, alleging that the committee behind the report “cherry-picks statements out of context, errs on other matters, and does not deliver the objective analysis promised.”

The document also delves into the promises made to customers, the company's corporate guidelines, the failures of oversight functions, and investment failures. The report's findings highlight the importance of robust risk management and the potential consequences of ignoring such systems in the rapidly evolving crypto industry.