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Report: BlockFi’s Risky Investment in FTX and Alameda Despite Knowledge of Infamous Balance Sheet

In a newly unsealed report, details emerged about BlockFi Inc.’s executives allegedly disregarding repeated warnings from their risk management team regarding substantial loans to Alameda Research, led by Sam Bankman-Fried, and backed by digital tokens from FTX.

The report, presented by a committee representing BlockFi’s unsecured creditors, accuses the cryptocurrency lender of misleading investors, taking shortcuts, and making significant investments in FTX, despite possessing access to a confidential balance sheet that revealed vulnerabilities in Bankman-Fried’s business.

These findings, recently made public, point to missteps by BlockFi’s CEO, Zac Prince, and other senior managers as key factors contributing to the company’s failures.

Interestingly, this revelation surfaced shortly after BlockFi conducted its investigation, claiming that Prince and other executives had little reason to be concerned about lending to Alameda before the platform faced allegations of fraud and eventually collapsed.

BlockFi’s Risky Alameda Lending: CEO Ignored Warnings, Accumulated $1.2 Billion Exposure

In a submission made on July 14 to the United States Bankruptcy Court for the District of New Jersey, the unsecured creditors’ committee disclosed critical information regarding BlockFi’s risk management team’s warnings about the “high risks” associated with lending assets to Alameda.

According to the committee’s report, BlockFi CEO Zac Prince allegedly disregarded the risk management team’s concerns and proceeded with lending Alameda a substantial sum of $217 million by August 2021.

One of the main concerns raised by the team was the potential risks if the FTX Token (FTT) used as collateral for the loans had to be liquidated.

Following January 2022, the risk management team ceased issuing memos to Prince regarding the potential risks associated with lending to Alameda, opting for “offline meetings and Slack” discussions instead. This shift in communication channels may have had implications for how the risks were being addressed and managed within the company.

During their communications, the BlockFi CEO occasionally acknowledged the exposure to risks related to lending assets to Alameda. However, despite these acknowledgments, the firm continued its dealings with Alameda. By the time BlockFi declared bankruptcy, the company had approximately $1.2 billion in assets tied to FTX and Alameda.

A CoinDesk article published on November 2 highlighted that FTX’s hedge fund arm, Alameda Research, had a significant portion of its balance sheet invested in its own FTT token. This revelation had a severe impact on confidence in the exchange, ultimately leading FTX to file for Chapter 11 bankruptcy just nine days later.

Surprisingly, BlockFi, which collapsed a few weeks after FTX, appeared undeterred by FTX’s internal issues and continued its dealings with Alameda, according to claims made by BlockFi creditors. This suggests that BlockFi may not have fully taken into account the risks associated with its exposure to FTX and Alameda’s toxic arrangements.

According to the creditors’ statements, BlockFi had access to the same balance sheet that was later revealed in court before engaging in any cryptocurrency transactions on the FTX/Alameda platform during the second half of 2022.

This included an investment of nearly $900 million that BlockFi re-lent to Alameda between July and September 2022. Unfortunately, this substantial amount is now considered potentially irretrievable.

The report mentioned that BlockFi recalled its loans from Alameda in June 2022, and Alameda repaid its outstanding balance to almost zero. At that point, BlockFi had the option to terminate the relationship. However, instead of cutting ties, BlockFi chose to re-lend nearly $900 million to Alameda between July and September 2022. Notably, this new loan was primarily backed by FTT as collateral.

This decision by BlockFi, given the previously known risks and issues with Alameda’s balance sheet, has come under scrutiny as it significantly increased the exposure and potential losses for the company.

BlockFi Challenges Committee’s Report, Citing July 10 Filing

BlockFi has responded to the committee’s report by disagreeing with its findings and referring to their own filing on July 10. According to BlockFi, their management needed a clear understanding of the risks associated with misusing client funds or engaging in transactions.

BlockFi’s filing asserts that the company and its parties were unaware of the true nature of FTX and Alameda, and they believe that the legal claims do not warrant pursuing legal action from a cost-benefit perspective.

A spokesperson for BlockFi stated that they disagree with the committee’s report. In a separate court filing, BlockFi further alleged that the committee had cherry-picked statements out of context, made errors on other matters, and failed to deliver the promised objective analysis.

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