We provide all of our clients a non-interest bearing account to store supported digital assets (the “Wallet”). Digital assets transferred to a Wallet account are not deployed by us for our revenue generating activities and are instead held in wallets we control or with our custodial partners. The Wallet also facilitates the ability of our clients to use our other products and services, such as: (i) opening interest earning accounts; (ii) trading digital assets through our platform, (iii) receiving U.S. dollar and stablecoin loans secured by digital assets; and (iv) receiving digital asset rewards through our BlockFi Rewards Visa® Signature Card. As of March 31, 2022, the fair value of digital assets in Wallet accounts was approximately $0.5 billion.
BlockFi Interest Account and BlockFi Personalized Yield
Our non-U.S. clients have the option to transfer supported digital assets to an interest bearing BlockFi Interest Account (“BIA”). As of February 14, 2022, our U.S. clients no longer have the ability to transfer supported digital assets to a BIA. U.S. clients with BIAs that existed prior to February 14, 2022 are able to maintain their BIAs and to receive interest and redeem as in the past, but they can no longer add new assets to their BIAs.
We also borrow digital assets from clients pursuant to individually negotiated borrowing arrangements that are negotiated to accommodate a client’s objectives, including through BlockFi Personalized Yield (“BPY”).
Digital assets transferred to us through a BIA or BPY or other type of individually negotiated borrowing arrangement are used for our revenue generating activities in the digital asset markets, which currently consist primarily of activities relating to lending to our retail and institutional clients and facilitating digital asset trading on behalf of our retail and institutional clients. Specifically, we may, in our discretion, pledge, repledge, hypothecate, rehypothecate, sell, lend, or otherwise transfer, invest or use any amount of digital assets transferred to us separately or together with other property, with all attendant rights of ownership, and for any period of time and without retaining in our possession and/or control a like amount of digital assets. If we choose not to deploy certain digital assets, we store those digital assets using various custodians, exchanges, and wallet providers.
If a client transfers digital assets to us through a BIA or a BPY or other type of individually negotiated borrowing arrangement and then elects to use such assets as collateral in connection with a loan we make to the client, such assets will cease to earn interest in the client’s account. Once a client has repaid the loan in full, it can elect to have the digital assets used as loan collateral transferred back to its interest earning account.
BlockFi’s core value is Transparency Builds Trust - maintaining and expanding our clients’ trust is paramount to that. As such, we view risk management as key to our success. We seek to monitor and control our risk exposure through an enterprise risk management framework, including by managing liquidity and credit risks that could potentially impact our obligations to clients that have a BIA, or with whom we have a BPY or other type of individually negotiated borrowing arrangement.
We seek to maintain the liquidity necessary to meet all our obligations under our core business activities, which includes institutional and retail borrowing and trading activities. We seek to maintain sufficient levels of short-term assets to meet client redemption and payback obligations, as well as to support trading activity, by keeping sufficient balances in inventory.
We have established the following guidelines to manage our liquidity risks and available balances of short- term assets:
- We will hold at least 10% of total amounts due to clients upon demand in inventory, ready to be returned to clients.
- We aim to hold at least 50% of total amounts due to clients upon demand either in inventory or in loans that can be called within seven calendar days.
- We aim to hold at least 90% of total amounts due to clients upon demand either in inventory or in loans that can be called back within one year.
As of March 31, 2022, the fair value of the stablecoin and other digital assets on our BIA platform, together with the stablecoin and other digital assets transferred to us through BPYs and other types of individually negotiated borrowing arrangements, totaled approximately $8.9 billion, and the fair value of digital asset collateral in connection with loans we made to clients and that is, subject to contractual arrangements and operation of law, able to be transferred, sold or otherwise rehypothecated by us, totaled approximately $5.7 billion. Of this approximately $14.6 billion in total, approximately:
- 43% was lent by us to institutional and retail borrowers
- 54% was held in inventory with third-party custodians and multi-party-computation wallets and accounts;
- 2% was held with banks and brokers in the form of cash or securities; and
- 1% was deployed as investments, posted as collateral or held as other assets.
We manage digital asset conversion risk by seeking to match liabilities with corresponding digital assets held on hand or deploying digital assets into loans or investments that will generally generate returns in the same denomination of the corresponding liabilities.
As of March 31, 2022, the fair value of our outstanding loans to borrowers was approximately $6.3 billion. We require many, but not all, borrowers to post varying levels of collateral depending on the borrower’s credit profile and the size of the loan portfolio. As of March 31, 2022, our net exposure was approximately $1.6 billion. We define net exposure as the sum of our net exposures to individual loan counterparties. Our net exposure to each individual loan counterparty equals the fair value of loans to the counterparty minus the fair value of collateral provided by the counterparty (excluding any amount of the counterparty’s collateral that is in excess of the counterparty’s loans). The average term of our loan portfolio is less than one year.
Institutional Loan Portfolio
We enable institutional clients such as hedge funds, market makers, proprietary trading firms, over-the- counter trading desks, and corporations such as exchanges and digital assets miners to obtain financing from us in the form of digital assets or U.S. dollar fiat currency. Interest on these loans is typically fixed and payable in kind, and the average term of these loans is less than one year.
As of March 31, 2022, the fair value of our outstanding loans to institutional borrowers was approximately $5.6 billion. Each institutional client that borrows from us undergoes a credit due diligence process to allow our credit risk underwriting team to establish appropriate credit limits. We have established an internal credit lending policy that generally limits exposure to any one borrower, principal or guarantor based on net exposures, which represents our aggregate exposure to economically related borrowers for approval purposes. Based on our internal credit process, our loan approvals follow a transaction authority and credit limit matrix, which are based on a counterparty’s financial information and size, business model related to traditional or digital assets markets, country of domicile, leverage, and other credit measures.
We require many, but not all, institutional borrowers to post collateral in the form of digital assets, cash or other assets. Whether we require institutional borrowers to post collateral and, if so, the type and level of collateral we require, depends on the borrower’s credit profile and the size and composition of the loan portfolio. The collateral provided by our institutional borrower clients may also be subject to margin calls if the loan to collateral value ratio breaches certain thresholds set forth in their loan agreements.
Retail Loan Portfolio
We provide retail clients access to U.S.-dollar and stablecoin loans secured by digital asset collateral. We determine the interest rates for these loans based on the level of over collateralization and the type of digital asset collateral. Interest on these loans is generally payable on a monthly basis, with the principal due at maturity. Loans typically mature in one year, subject to our clients’ option to prepay without penalty.
As of March 31, 2022, the fair value of our outstanding loans to retail borrowers was approximately $0.7 billion. We typically allow retail clients to borrow funds with a value of up to 50% of their collateral. Given the volatility in digital asset markets, the collateral provided by our clients is subject to margin calls. If the value of a digital asset decreases significantly, such that the loan to value ratio is above a specified threshold, we will make a margin call to the client. If the client does not meet the margin call, we may liquidate a portion of the collateral and reduce the amount of the outstanding loan. If the loan to value ratio increases to an accelerated threshold at any time, we are authorized, without providing client notice, to liquidate the collateral to reduce the amount of the outstanding loan. Conversely, if collateral values increase, we may allow borrowers, upon request, to remove excess collateral. If a client defaults on repayment, we may liquidate an amount of collateral held for the client up to the value of the loan plus all additional amounts owed by that client.
BlockFi Interest Account has not been registered under the Securities Act and may not be offered or sold in the United States, to U.S. persons, for the account or benefit of a U.S. person or in any jurisdiction in which such offer would be prohibited.
Digital currency is not legal tender, is not backed by any government, and the Wallet, BlockFi Interest Account and BlockFi Personal Yield are not bank accounts nor brokerage accounts, and are 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. These are not risk-free products and loss of principal is possible.
Not all products and services are available in all geographic areas and are subject to applicable terms and conditions. Eligibility for particular products and services is subject to final determination by BlockFi.
This communication contains “forward-looking statements”, which involve risks and uncertainties. You should not place undue reliance on forward-looking statements because they are subject factors which are difficult to predict. These forward-looking statements are generally identified by the use of “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “target,” “will,” “would” and similar expressions. We do not undertake to update any forward-looking statement as a result of new information or future events or developments.