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).
As of March 31, 2021, BlockFi held approximately $14.7 billion in client assets on its BIA platform, an increase of $10.3 billion or 3.3x from December 31, 2020. As of March 31, 2021, 43% of those assets were held with third-party custodians; 20% in liquid investments in equities, futures, and options; and the remaining 37% was used as collateral for hedging activities or lent, 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).
In accordance with this arrangement, as of March 31, 2021, BlockFi was due $5.4 billion from borrowers in the form of negotiated loans, an increase of $2.8 billion or 2.1x from December 31, 2020. In addition to the creation of these offsetting positions, BlockFi requires most borrowers to post varying levels of collateral for its lending activity dependent on the borrower’s credit profile and the size of the loan. As of March 31, 2021, on average 77% of these loans had the additional protection of collateral held with or pledged to BlockFi, with $1.2 billion of net exposure (less than 8.5% client assets on the BIA platform). The average duration 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.
As of March 31, 2021, no borrowers showed signs of default on payment and, to date, BlockFi has never incurred a lending loss on any of its loans. 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.