In a recent court filing, it has been revealed that the CEO of BlockFi, Zac Prince, allegedly ignored recommendations from the company’s risk management team regarding lending assets to Alameda Research, contributing to the firm’s eventual collapse. The filing, submitted to the United States Bankruptcy Court for the District of New Jersey by the unsecured creditors’ committee, states that BlockFi’s risk management team had expressed concerns about the “high risks” associated with lending assets to Alameda. Despite these warnings, Prince reportedly dismissed the team’s concerns when BlockFi loaned Alameda $217 million by August 2021.
The risk management team further highlighted potential risks in the event that the FTX Tokens (FTT) used for collateralizing the loans needed to be liquidated. They noted that Alameda’s balance sheet heavily relied on approximately “~7bb unlocked FTT, and 11bb total including locked tokens based on unaudited financials.” This raised alarms within BlockFi, but Prince seemingly disregarded these concerns and encouraged the risk team to become comfortable with Alameda’s borrowing size, comparing it to that of a large borrower like “three arrows,” but with FTT and other types of collateral instead of GBTC shares.
After January 2022, memos addressing the risks of lending to Alameda were no longer issued to Prince by the risk management team. Instead, discussions were moved to offline meetings and Slack channels, where Prince occasionally acknowledged the exposure. At the time of its bankruptcy filing in November 2022, BlockFi had approximately $1.2 billion in assets tied to FTX and Alameda.
The report also mentioned that BlockFi recalled its loans from Alameda in June 2022, and Alameda repaid its outstanding balance to almost zero. However, BlockFi then proceeded to re-lend Alameda nearly $900 million between July and September 2022, mostly collateralized by FTT tokens. The filing emphasizes that while Alameda/FTX’s downfall may have triggered BlockFi’s collapse, the root causes were rooted in business practices and decisions that preceded the bankruptcy filing of Alameda/FTX.
BlockFi has stated its disagreement with the report, with a spokesperson asserting that the firm believes the committee behind the report selectively used statements out of context and made errors on other matters. In its own court filing, BlockFi attributed exposure to FTX as one of the reasons for its bankruptcy filing. FTX’s practice of collateralized loans based on FTT tokens left several firms facing significant losses when the token’s price plummeted from over $25 to under $2 during the Chapter 11 filing and reported liquidity issues.
Overall, this court filing reveals the alleged disregard of risk management recommendations by BlockFi’s CEO, exacerbating the collapse of the company due to its exposure to FTX and Alameda. The incident highlights the importance of effective risk assessment and management in the cryptocurrency industry and raises questions about business practices and decision-making within the firm.