Babel Finance lost over $280 million in proprietary trading with customer funds

Quick Take

  • Babel Finance lost 8,000 BTC and 56,000 ETH in proprietary trading with customer funds, according to a restructuring proposal deck obtained by The Block.
  • The troubled firm now seeks to convert hundreds of millions of dollars of debt into equity and raise more funds in a revolving credit facility, per the deck.

Babel Finance, the troubled Asian crypto lender that abruptly halted client withdrawals last month, suffered heavy losses due to proprietary trading with customer funds, according to its restructuring proposal deck obtained by The Block.

The deck, dated July 2022, reveals that Babel Finance lost more than $280 million in bitcoin (BTC) and ether (ETH) due to its proprietary trading failure. Specifically, it lost around 8,000 BTC and 56,000 ETH in June after facing liquidation due to a significant market downturn.

"In that volatile week of June when BTC fell precipitously from 30k to 20k, unhedged positions in [proprietary trading] accounts chalked up significant losses, directly leading to forced liquidation of multiple Trading Accounts and wiped out ~8,000 BTC and ~56,000 ETH," reads the deck.

Due to these massive losses, Babel's lending and trading departments were unable to meet margin calls from counterparties.

"Conclusion: Single point of failure - The Proprietary Trading team's failed operation falls outside of the company's normal business which has otherwise been running smoothly with proper management and control," according to the deck.

Babel Finance describes its proprietary trading business as a "risky" business yet it failed to hedge its positions.

"A Proprietary Trading team operates several Trading Accounts not controlled or monitored by Trading Department; no trading mandate or risk controls were implemented for these accounts; no PnL [profit and loss] was reported," per the deck.

Orders from Babel's proprietary trading team were "not supported by any term sheets and thus were not recorded in system." Plus, the firm's wallet management team "released uncapped amount of funds" to trading accounts operated by its proprietary trading team.

This is not the first time Babel Finance has reportedly played with customers' funds. In October 2020, leaked recordings suggested that the firm leveraged some user funds to boost a bitcoin trade and faced potential default risks during that year's Black Thursday market crash.

At the time, Tether reportedly stepped in to save Babel Finance, per the recordings. The stablecoin issuer was said to have extended margin call deadlines for Babel to a month so that the firm would have more time to bolster its collateral.

A Babel Finance spokesperson declined to comment to The Block on specific questions related to the deck, but they said that the firm is "working closely with clients, investors and other stakeholders and external advisors during this very difficult time in the industry as we believe that is the best path for a full recovery and value maximization for all the parties."

Babel's restructuring proposal

As part of its rescue plan, Babel now seeks to raise hundreds of millions of dollars in debt and equity investments.

First, it seeks to convert $150 million of the biggest creditors' debt to convertible bonds, per the deck.

Additionally, it looks to raise $250 million to $300 million in convertible bonds and then secure a revolving credit of $200 million from creditors "for business restoration."

The plan, if successful, would turn Babel's largest creditors into shareholders.

It remains to be seen whether Babel — which is backed by high-profile investors including Sequoia Capital China, Dan Tapiero's 10T Holdings, Dragonfly Capital and Circle Ventures — will be able to raise fresh capital.

Just days before its financial woes, Babel had raised $80 million at a $2 billion valuation.

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