Facing a liquidity crisis, this week crypto lending platform BlockFi announced that it signed a term sheet with FTX to provide a $250 million revolving line of credit, which will be used to bolster its balance sheet and provide liquidity across all account types.
According to some market observers, the transaction marks an inflection point not only for BlockFi but for the whole industry.
While the line of credit from FTX will help reduce short term risks, now the question is how the firm’s operations might change in response to current market pressure. A client of BlockFi’s institutional business told The Block that BlockFi representatives say that it will be “highly conservative” going forward, meaning that they might halt lending or slow down originations.
When asked about the comment, a BlockFi spokesperson referred The Block to a recent Twitter post from CEO Zac Prince, in which he said the firm would “continue to actively lend and operate normally.”
Like other lending platforms such as Celsius and Nexo, BlockFi has attracted customers by offering them high interest payments on the funds they deposit on the platform. Until recently, BlockFi offered its customers among the highest yield rates in crypto — on average around 6.2% annually for those lending less than 10 BTC, or $200,000 at the current market rate.
In comparison, Celsius was offering their customers a flat rate of 2.5% annual yield for bitcoin deposits and traditional banks typically offer their clients rates below 1% annually.
Lending platforms make money by lending out customer funds and collecting a share of the payment, or by investing the funds in other market opportunities. Because borrower demand is not consistent, however, especially during bear markets, some say that the business model is unsustainable.
Before BlockFi reached this agreement with FTX, it had struggled to raise cash in recent weeks despite offering a steep discount on its valuation. Last fall, the firm raised $400 million at a $5 billion valuation. Now it is attempting to raise $100 million at a $1 billion valuation — an 80% decrease in value. On June 13 Prince said the firm would be reducing its headcount by “roughly 20%.”
Given that BlockFi is one of crypto’s largest lenders, the recent developments raise questions about how a change in the way it operates might ripple across the broader market — both now, and in the future.
According to Laura Vidiella, vice president of business development and strategy at LedgerPrime, a crypto derivatives market maker, things are getting more expensive at every level of the market. To get loans, customers are having to put down collateral worth more than the loan itself. “There’s no debt right now being issued with collateral less than 110% where before we were getting 0% to 50%,” Vidiella told The Block.
“We don’t know if between today and the end of the month people are going to be requesting return on capital,” she added. And with these fears, she said, the risk may “spill over all of DeFi” and lead to less lending, declining value deposited in decentralized protocols and lower valuations.
At a macro level, said David Weisberger, CEO of Coinroutes, the biggest short-run fear is liquidity cascades. “FTX making this offer to BlockFi takes one more name off the list of potential forced liquidations … but there are others and no one quite knows when all of the excess leverage is going to be out of the system.”
Last week, a number of high-profile crypto platforms liquidated large positions by prominent crypto investment fund Three Arrows Capital. The firm’s apparent liquidity crisis has had a wide-reaching effect on the crypto market.
A turn toward transparency
The only way to restore confidence in the market, said Weisberger, is to have “more transparency.”
Vidiella agrees. She said that one result of this market cycle is likely to be a consolidation of standards, from collateral requirements to how the health of a fund is verified.
“Right now, we really don't have any way [of verifying health] besides saying, ‘Oh, these guys have been around for more than five years and they've been through a few bear markets so they probably know what they're doing.'” Instead, she says, firms’ should make their balance sheets more transparent.
It’s likely to start with BlockFi, said Weisberger. “I would not be surprised if one of the conditions of the credit line [from FTX] was more transparency from BlockFi on what they're doing.” The BlockFi spokesperson told The Block that the firm is still negotiating the terms of the deal and cannot share more information at this time.
Weisberger thinks many firms are primed to become more open about their dealings. “I think people are going to use [transparency] as a competitive weapon,” he said. “A lender who markets themselves on the basis of opaque methodology … isn't necessarily bad, as long as they disclose that. But if it's disclosed as risk-free trading that’s a real problem.”
The sentiment seems to be shared by other major industry players. On Wednesday, Cumberland, one of crypto’s leading liquidity providers, tweeted: “The companies that survive this month are going to do so by getting stronger, by thinking about risk in a more robust way, by preparing for the worst outcome instead of the best.”
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