When clients send crypto to their BlockFi account or purchase additional crypto within the BlockFi Interest Account (“BIA”), that digital asset is replaced with an obligation to return the same amount of that crypto plus any interest earned.
In order to pay our clients crypto interest on a monthly basis and to meet withdrawal requests on a timely basis, we engage in a number of activities, including (1) keeping a material amount of digital assets available for withdrawal with third parties such as Gemini, BitGo, and Coinbase; (2) purchasing, as principal, SEC-regulated equities and predominately CFTC-regulated futures, and (3) applying risk management to the lending activities in the institutional market. The credit risks to these institutions are mitigated by credit due diligence and/or collateral (such as cash, crypto, or other assets). BlockFi also engages in a number of other revenue-generating activities that support its balance sheet and its payment of crypto interest.
As of June 30, 2021, BlockFi held approximately $10.3 billion in client assets on its BlockFi Interest Account(“BIA”) platform, a decrease of $4.4 billion or 30% from March 31, 2021, and an increase of $5.9 billion or 134% from December 31, 2020. During the most recent period there was a broad reduction in the price of digital assets which is reflected in the overall change in BIA balances. At the same time over 150,000 new clients funded and began using the BIA platform.
Of the $10.3 billion in client assets,
- 46% were lent,
- 38% were held with third-party custodians,
- 6% were held with banks and brokers, and
- the remaining 10% was held in other liquid hedging positions and collateral, in accordance with BIA’s Account Terms.
Each such activity resulted in an offsetting position that matched the client BIA positions (not accounting for fee and interest payments received or owed).
As of June 30, 2021, BlockFi was due $4.8 billion from borrowers in the form of negotiated loans, a decrease of $0.6 billion from March 31, 2021, and an increase of $2.2 billion or 85% from December 31, 2020 . BlockFi requires most borrowers to post varying levels of collateral for its lending activity depending on the borrower’s credit profile and the size of the loan portfolio. As of June 30, 2021, on average 75% of these loans had the additional protection of collateral held with or pledged to BlockFi, with $1.2 billion of net exposure (less than 12% client assets on the BIA platform). The average term of our loan portfolio is less than one year and additional collateral may be required for posting to BlockFi depending on terms and market conditions.
To date, BlockFi has originated nearly $20 billion in digital asset related loans and has not incurred an actual credit loss. Additionally, no borrowers have shown signs of default on payment. BlockFi evaluates any unsecured lending based on rigorous underwriting and due diligence on the counter-party. To protect against any future event of default, beyond what is posted as collateral, BlockFi maintains a credit reserve provision of approximately 0.5 - 0.6% across all loans outstanding.
The BIA Account Terms permit BlockFi to take up to seven days after a client submits a withdrawal request to process the request for such return. This allows time for BlockFi to recall loans, should that be required. To date, this feature has not been utilized and all transfers out of BIA accounts have been honored on demand (taking into account routine operational constraints, including identity verification, as appropriate) using client assets held with our third-party custodians.
Digital currency is not legal tender, is not backed by any government, and the BlockFi Interest Account is not a bank account nor a brokerage account, and is not subject to FDIC, SIPC, or other similar protections. Interest rates, withdrawal limits, and fees are subject to change and are largely dictated by market conditions. This is not a risk-free product and loss of principal is possible.
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