Editor’s note: This article is compiled from the Coindesk report, the author: Anna Baydakova.
The full text summary:
BlockFi deposit receipts account in 1 months and this month launched a comprehensive on-line, has attracted more than 3500 million dollars, most of which are cost of encryption, lent to lenders.
BlockFi’s terms of service so that the company has great leeway in how to use the funds and pay depositors interest. CEO Zac Prince said, this flexibility is necessary for the rapid development of the company.
Institutional investors borrowed assets in terms of the encryption also depending on the circumstances, the interest rate is 4% to 12%, BlockFi can be called at any time loan.
When the encrypted currency prices rose sharply, the BlockFi allow borrowers to provide more collateral or collateral to sell part of risk management.
BlockFi plans to launch a new product every 6 months and raise more funds.
Founded in 2017, encryption currency lending startups BlockFi, is by virtue of its new product interest account (BIA) become Defi in the field of the eye of the storm.
What is the product? In the global user account bitcoin or Ethernet Fang to earn interest, BlockFi provide monthly compounding for customers (with Lee, Lisheng mode) the annual interest rate of about 6.2%, the user can withdraw funds at any time.
According to CEO and founder Zac Prince said, since the beginning of January beta test, the user has more than $35 million (about 80% of the crypto currency bitcoin) to deposit their savings account. Among them, $25 million is collected after the official release in March 5th, so far it is only in the past two weeks.
However, voices of doubt also emerged.
Lawyer Stephen Palley pointed out that although BlockFi claims of 6.2%, but according to the product terms, companies can modify rates. Another voice says, is not the same as the insured deposits in the bank, “so you rise in 6.2% is limited, but you fall is 100%”.
Wall Street veteran Caitlin Long pointed out that the encryption currency in BlockFi, people put themselves exposed to some form of counterparty risk, “I don’t see this aspect of the disclosure,” she wrote, adding that the re mortgage funds of customers (retail deposit lend institutional investors), BlockFi it will face legal challenges some states of the United states.
In view of the market is controversial for the product rate, CoinDesk and BlockFi’s CEO Zac Prince talked about their business operations, and most importantly, how to manage the risk of BlockFi.
Lend fiat money, borrowed encrypted assets
Blockfi currently offers two products: to retail mortgage lending and deposit interest bearing account currency.
Through mortgage lending, customers will bitcoin, Wright coins or etheric Fang as collateral to borrow $4.5% annual interest rate currency, the amount of loans to customers only collateral value of assets 50%.
The coin interest credited bitcoin customers through BlockFi or Ethernet to 6.2% square, monthly compound annual rate of accumulated interest (by means of encryption valuation). This Bibi treasury or the United States bank savings account yields of 2 to 3 times.
At the same time, the terms and conditions of clear interest will be decided by BlockFi.
When asked whether there is any BlockFi for determining the interest rate benchmark occasion (banks may consider such as LIBOR index, LIBOR index when setting interest rates based on the international financial market interest rates in most floating rate), Prince’s answer is very simple: “no.”
Prince believes that BlockFi is not based on any formula can change the interest rate flexibility, he said for potential users more attractive, the products do not make money: “rate is the market and won the comprehensive results customer cost. This product can only maintain for a period of time may be 3 to 18 months. We can accept a period of losses, if it is pure formula, we might not have adequate control, to ensure that it can attract a large number of customers, so as to achieve our goal for customers. “
In order to rapidly expand the user base, BlockFi plans to launch a new product every six months, and raise more funds. (at present, BlockFi has completed several rounds of venture capital, one of the biggest round of Novogratz by Mike under the Milky Way digital Galaxy Digital lead investor, raising a total of $52 million 200 thousand. )
Prince explained: “we believe that we will be able to continue to raise venture capital to support user growth. Sometime in the future, when we are larger, perhaps until after the listing, we only consider the profitability of this matter, we expect that in the next period of time, at least for a few years, we will be able to raise more capital risk.”
Lending to the encryption mechanism
Third things BlockFi did, and no publicity is to retail loans to financial institutions, the encryption. “We don’t really think it is a kind of product,” Prince said, “we need to do this, to deliver the products to our core customers – retail.”
In fact, this is why BlockFi can earn money to pay for encryption, because retail deposit money interest.
$35 million in deposits, most institutions are lent to borrowers, each deposit most of them have gone to small business loans, keep as reserves, but BlockFi did not disclose the exact ratio.
The account holder’s assets will be Company by Gemini Trust, LLC (Tyler Winklevoss led by Cameron and encryption currency exchange) hosting. Gemini is directly regulated by the New York State Department of financial services. BlockFi itself does not have encryption key control funds, “said Prince.
At present, the portrait of BlockFi mostly into two groups: playing bitcoin futures and traditional financial institutions, especially its proprietary trading and market maker.
Prince said the loan assets of the encryption mechanism vary from case to case, interest rates in the 4% to 12% yuan, the collateral (either dollar or the stable currency, the Gemini Paxos Standard is) can be 110% of the loan amount to 150%. The relationship between borrowers by a separate ISDA protocol (standard file management of OTC derivatives for selling book and movie “the big short” famous) control.
The loan period may be different, but the BlockFi reservation one week’s notice in advance of the case, and the right to recover the loan, depositors withdraw notice encryption deposit the same amount of money. Prince said that this provision to ensure that we always have enough assets to meet the request of encryption and borrowed coins coin money people.
Then, when the encryption of price fluctuations (often) what happens?
When prices fall, mortgage lending clients collateral will shrink, loan value ratio (LTV) will rise from 50% to higher. On the other hand, if the price is soaring, financial institutions will find assets to repay the borrowed encryption cost of their loans higher. In this regard, Prince said, BlockFi has taken some measures to reduce the risks.
For mortgage customers borrowed currency assets encryption, if at a certain point in time, the amount of cash in a retail borrowing equals the collateral 70% instead of 50%, in order to return to a more secure LTV ratio, BlockFi will contact the customer within 72 hours, or repay the loans, more collateral, or take no action. If you do not take action, according to the provisions, BlockFi will be in the exchange or through the OTC trading platform to sell part of the collateral, for the repayment of loans, and mortgage guarantees “back to the safety zone” (50% LTV).
The same mechanism also applies to the mortgage assets of institutional investors to borrow legal tender encryption: if bitcoin prices rise, and they borrowed assets relative to the final cost of cash collateral amount higher, BlockFi will contact them and ask them to add more cash. If bitcoin prices reached a certain preset level, this level between different borrowers is different, BlockFi can use the collateral to buy bitcoin and settle the loan.
In terms of the degree of credit institutions is highly dependent on the specific customer. As Prince said: “if we want to chase Morgan to borrow $1 million, we may be free deposit.”
In addition, the structure of these loans so that if needed, BlockFi can hold more wealth in the behind. Prince said: “if the breach of contract, we are faced with a subsidiary of the loan, we must ensure that its parent company has passed.”
Law and regulation
Prince believes that if the borrower defaults, the people’s court is not a problem. He said, “we lend sb the legal structure of encryption currency, and we guarantee to lend sb yen dollar is not what different.”
As for regulatory compliance, in 47 states need a loan license, BlockFi license “”.
BlockFi marketing director Brad Michelson said: “the state does not currently support the Nevada, because it requires you to set up an office in the state, this is not our current plan”, and the other two were excluded, he hasn’t said.
As for the coin interest accounts, in addition to New York, Connecticut and Washington and the United States, Britain and the European Union approved by the state, they can be used in the whole world.
BlockFi does not hold the state of New York BitLicense, so BlockFi in New York only loans but not the establishment of a deposit account.
Some state loans license BlockFi exhibited in his office
BlockFi said on the website of the terms and conditions of the company to the counterparty to provide loans, sale, mortgage, re mortgage, transfer, investment, mixed use, or otherwise dispose of funds and encryption of monetary assets, we will try our best to prevent any “loan for use of customer funds to provide more leeway.
In addition, users will automatically give up paper copy, get the contract sued or request the right to a jury trial on BlockFi; the company also can change the terms at any time, it is the responsibility of the user “from time to time to check these terms.
Prince explained that the only real risk of an encryption are described in terms of investors.
“Because the encryption in the regulatory gray area, in order to protect the company, we must be very careful about the contents of the agreement,” he said. “The premise of twenty-two clauses is that you have a lawyer, you disclose any risk, you try to protect your company is not affected by the regulators, you need to write something like this.” He added: “the liar is not to write something like this.”
As for the pledge (deposit encryption currency loan to institutional investors), Wall Street veteran Caitlin Long and others believe this center draw further apart with bitcoin, but Prince think this is a necessary condition for the new encryption market growth. He explained that one of the benefits of re mortgage is that it allows the agency to reduce transaction costs and allow short selling.
“If you don’t have a two-way market, you can not find the real price of an asset. Re mortgage is a major factor in achieving this goal. “
After all, any investment is risky, but BlockFi is blunt, Prince concludes: “if you risk disclosure to read IPO prospectus, you might think that this is the history of the most terrible things in my life no longer stock investment!”