The crypto lending company based in New-Jersey BlockFi has filed for bankruptcy in September, 2022. The employees of BlockFi had warned the company of credit risks. However, the executives of the company had ignored the warnings with dismissal.
In the filing that appeared to be a victim of the plummeting crypto prices added with the collapse of crypto brokerage FTX and its partner trading firm Alameda, what really seems to have led to the bankruptcy was its drastic failure of risk management with concentrated pool of borrowers, low lending standard and rampant trading activity which was unsustainable.
In the year 2021, when the prices of the crypto was ballooning, BlockFi started aggressive expansion to meet the client demands. Their asset accumulation which was 1 billion in the year 2020 stood increased to 15 billion in the year 2021. It had started hiring 75 people in a month in the later part of the year.
In interviews with staffs, former and current, it was learnt that the submissions of the risk management team fell on deaf ears. The executives were totally focused on driving growth to the investors, throwing all caution to air.
BlockFi was acting as a company similar to a bank, where the retail investors (individuals who buy or sell asset for individual and not for a company) to keep their funds and get interest. However, BlockFi had been using these deposits for unsustainable trading activity and questionable lending. Although BlockFi had claimed that they over-collaterize while providing their loans, big borrowers were often times not willing to over-collaterize. With steep competition from other lenders, they began giving loan with lower collaterals, meaning that the value of the collaterals were lower than the loan value.
In addition to keeping lower collateral, BlockFi had also flaws in their process whereby they were not auditing the asset value and balance sheet of the borrowers, giving way to manipulation. The balance sheet accepted by the borrowers were accepted with no questions asked.