BlockFi withdrawals: CeFi exchange lender in spotlight amid 3AC fallout

Rumours claim a firm recently liquidated by BlockFi was hedge fund Three Arrows Capital

The BlockFi logo on a phone in front of a screen displaying its home page                                 
BlockFi is reducing its workforce by 20% to protect its path to profitability – Photo: Shutterstock
                                

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The recent crash provoked by the decision of lending platform Celsius to impose a withdrawals freeze has seen major cryptocurrencies drop to two-year lows. But Celsius’ main competitor, BlockFi, has managed to withstand the crypto winter.

While the crypto bank is seeing increased demand from institutions, it has still found itself in the midst of controversy. BlockFi revealed it had liquidated a large institution and there are claims that it was the hedge fund Three Arrows Capital.

The borrowing and lending platform has also announced staff cuts with a 20% reduction to its workforce.

The crypto crash

Just after the market had started to stabilise from the Terra collapse in May 2022, it took another plunge. Bitcoin plummeted to the $18,000 mark and Ethereum stooped below $1,000, their lowest values since the beginning of 2021. Other decentralised finance (DeFi) coins saw a huge drop in value as a result.

This crash followed Celsius freezing customer withdrawals. The borrowing and lending platform had faced fears of insolvency after tough market conditions and subsequently paused transfers, which initiated the steep decline in crypto prices.

Other exchanges followed suit. The largest cryptocurrency trading platform Binance briefly paused Bitcoin withdrawals. Babel Finance also halted withdrawals citing liquidity pressures as the core reason.

BlockFi is a crypto bank that has a similar centralised finance (CeFi) model to Celisus, where it allows users to earn, lend and borrow cryptocurrencies. But the platform quickly distanced itself from its competitor with BlockFi withdrawals continuing to operate as usual, in spite of the slump. It clarified in a tweet that “BlockFi has no exposure to Celsius”.

Zac Prince, the New York based CEO of BlockFi, revealed in a separate tweet that BlockFi had in fact seen increased demand from institutional investors. After seeing growing attention following the Celsius scandal, Prince said it had satisfied all withdrawal requests.

Three Arrows Capital liquidation

But not all the demand from institutions has been going smoothly. On 16 June, BlockFi said it had liquidated a large client that failed to meet margin calls. The Finanicial Times was the first to name the hedge fund Three Arrows Capital (also known as 3AC) as the liquidated firm.

“BlockFi can confirm that we exercised our best business judgment recently with a large client that failed to meet its obligations on an overcollateralized margin loan,” tweeted Prince. “No client funds are impacted. We believe we were one of the first to take action with this counterparty.”

The Singaporean hedge fund has been facing speculation that it is “underwater” and facing liquidity issues. This stems from Three Arrow Capital’s almost $200m loss from Terra and its investment in staked ether (stETH), a crypto facing liquidity problems.

There are rumors that 3AC is dumping its stETH at discounted prices to keep it afloat. A Twitter account by the name MoonOverlord found wallets attributed to the hedge fund, which had exchanged more than 30,000 stETH.

Ownership of these wallets has not been confirmed or denied by 3AC nor have other rumours. However, Zhu Stu, the hedge fund’s co-founder, tweeted: “We are in the process of communicating with relevant parties and fully committed to working this out.”

Recently, CryptoSlate made the argument that 3AC’s debt is not as bad as it seems. Ryan Selkis, co-founder of market intelligence company Messari, spoke in a recent audio Twitter Space conversation, where he claimed the hedge fund has “$1.5bn of net liabilities”.

The crypto publication reported: “If the total exposure for 3AC is $1.5bn, as suggested by Selkis, then the direct effect on the market may be pretty minimal. That level of debt would represent just over 1% of the total market cap of the crypto industry and is less than the value of Bitcoin dumped by Terraform Labs during the LUNA crisis.”

Staff cuts

Yet the six-month bear market and recent crash is taking its toll on crypto firms. BlockFi has followed other exchanges with its announcements of staff cuts. The crypto lending platform will be reducing its workforce by 20%.

Prince said this was down to the “dramatic shift in macroeconomic conditions, which have had a negative impact on our growth rate.” In a Twitter thread, he revealed these cuts were an attempt to salvage BlockFi’s path to profitability.

Other major crypto firms have made similar moves. Coinbase instated a hiring freeze and controversially rescinded its recent job offers. Meanwhile, 10% of Gemini’s workforce is being laid off.

These staff cuts, the freeze in withdrawals, and insolvency of crypto firms are fuelling speculation that the crypto winter is here to stay. While BlockFi has managed to stay afloat after the recent crash, whether it can flourish will depend greatly on how well the market can recover.

FAQs

What is BlockFi?

BlockFi is a centralised finance platform that allows investors to borrow and lend cryptocurrencies. Lenders will receive a portion of the interest, which is supplied by borrowers.

How does BlockFi make money?

BlockFi generates most of its income from small fees charged on transactions. Other sources of revenue include interest paid by borrowers.

Who owns BlockFi?

Zak Prince is the founder and chief executive officer of the lending platform BlockFi. He has previously worked as a senior vice president at the payment platform Katapult.

How often does BlockFi pay interest?

BlockFi pays the interest accured by crypto lenders every month. Up to 15% annual percentage yield can be earned with its interest accounts.

What is 3AC?

Three Arrows Capital is a hedge fund based in Singapore that is currently facing rumours of liquidity problems and insolvency. This followed major cryptocurrencies, including Bitcoin, stooping to two year lows.

Further reading

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