Table of Contents
Introduction
BlockFi.com, founded in 2017, is a crypto savings and loans company based out of New Jersey in the United States. The company’s CEO and founder is Zac Prince and they have the backing of some of the biggest names in the space. The idea for BlockFi first came about after Zac was denied a mortgage from a bank in Texas because he reported cryptocurrency trading earnings. According to their website, the company mission is give crypto investors access to basic financial products such as interest accounts and credit.
“For years, crypto investors haven’t had access to basic financial products in the blockchain ecosystem. BlockFi bridges this gap by providing access to high-interest crypto accounts and low-cost credit products to clients worldwide”
Below we review BlockFi and the products they have on offer in some detail.
Overview of BlockFi
BlockFi is a cryptocurrency wealth management company that offers savings and lending solutions for holders of crypto.
Is BlockFi Safe?
BlockFi is registered with the U.S. Department of Treasury Financial Crimes Enforcement Network (“FinCEN”) as a money services business (“MSB”). The MSB Registration Number is 31000152316306.
BlockFi do not custody your crypto and instead use Gemini exchange as a partner for custody. Assets deposited with BlockFi are securely stored at unique wallet address generated by Gemini. Gemini exchange is licensed by the New York State Department of Financial Services, and is a fiduciary under New York Banking Law and adheres to capital reserve requirements. Gemini also has digital asset insurance coverage.
Rehypothecation
Nevertheless, it’s worth noting a few things about the operating model. BlockFi uses rehypothecation, which is quite a common practice in modern finance. Essentially, when you deposit funds you authorize BlockFi to use these funds in any way they deem appropriate. According to the company T&Cs this means:
“We will lend, sell, pledge, rehypothecate, assign, invest, use, commingle or otherwise dispose of funds and cryptocurrency assets to counterparties, and we will use our commercial best efforts to prevent losses.”
The idea of rehypothecation and fractional reserve banking are closely related. BlockFi lends in USD and takes deposits in BTC so naturally they need to operate on a fractional reserve basis for their bitcoin holdings. Fractional reserve are two words that raise alarm bells for many in the crypto world – particularly those from the Austrian school of economics. In simple terms it means that if everyone were to go and try to withdraw their Bitcoin from BlockFi at the same time then they would not be enough to pay out . From their terms of service, BlockFi state that there may be up to 7 days for withdrawals, which is to mitigate the risk of a “bank run”. They also have withdrawal limits defined.
“We initiate the withdrawal process as quickly as possible but may require up to seven (7) days to process withdrawals from your Crypto Interest Account for non-GUSD withdrawals.”
If the price of bitcoin goes up higher than the interest earned on loans, it’s potentially a problem.
BlockFi products
As mentioned, there are currently two main products are on offer:
1 - BlockFi Interest Account (BIA)
The BlockFi Interest Account (BIA) lets you put your crypto to work and earn monthly interest payments as you would traditionally with a bank savings account. The interest earned in your BIA is paid out at the beginning of every month and interest compounds monthly.
Tier 1 (capped at 10 BTC) has an APY of 6.2% and Tier 2 for all deposits over 10 BTC has an APY of 2.2%. There is one free withdrawal per client per month. After that, a withdrawal fee of either 0.0025 BTC or 0.0015 ETH applies.
2 - BlockFi Crypto Backed Loans
Crypto-backed loans allow you to access USD liquidity without selling your crypto holdings. It is a collateralized loan because you stake your crypto against it. Thus, by using your crypto as collateral, you can unlock up to 50% of the value of your assets in USD. This is useful for people needing to get fiat, but wanting to keep a longer term position in bitcoin. There’s also potential capital gains tax benefits to holding your crypto longer term. The website claims that you can get funded in as little as 90 minutes.
How does a BlockFi loan works?
BlockFi currently offers a LTV (loan-to-value) of 50%. The LTV ratio determines the amount of crypto collateral you need to post in order to take out a loan. So, if you have 10,000 USD worth of bitcoin and give this to Blockfi, they give you 5000 USD in return and the 10,000 USD of btc is sent to Gemini for custody. You then pay interest per month on the loan. The payments you make are interest-only, meaning you aren’t paying anything towards the principal amount. You eventually have to pay off the principal. BlockFi doesn’t charge early prepayment fees, so you can pay off your loan at any time without penalties.
Clients post collateral in Bitcoin, Ether, or Litecoin and “margin calls” happen when the value of your collateral decreases outside of a range. With a LTV of 50%, the first margin call trigger would occur at roughly 30% decrease in price from when you originally posted. You are then given a 72 hour window to either add more crypto to collateral, pay down the load in USD or take no action. If you take no action and after 72 hours the LTV ratio is still above the trigger then a partial liquidation happens to bring the LTV ratio back in. BlockFi’s first crypto margin call occurs at a 70% LTV.
How can I get a loan?
- Create an account
- Click on the Loan tab
- Click Apply and fill out the application.
- You will receive a decision from BlockFi in less than 24 hours
- Review your loan offer and sign the loan agreement
- Transfer collateral to BlockFi’s secure storage wallet
- Receive your loan the same day in USD via a wire to your bank account or stablecoin to your wallet address of choice.
- Make interest only payments monthly using USD, BTC, ETH or LTC
- Pay off the principal in one payment at the end of the term or refinance at current rates
Pros and cons of BlockFi
Pros
- Worldwide savings and loans
- No penalty for early repayment
- No credit checks
- Deposits securely stored at regulated custody service
- Stablecoin loans for those not based in the US
Cons
- Withdrawal fee of 0.0025 BTC ( passed on by Gemini)
- Risk associated with rehypothecation and fractional reserve
- No mobile app
Conclusion
BlockFi brings some much needed basic financial products to the crypto space. Greater financialization of the crypto ecosystem is accelerating and with it a new wave is capital is entering from both retail and institutions. . The “not your keys, not your bitcoin” mantra should be emphasized, particularly in the wake of so many exchanges getting hacked. However, as the crypto space expands and new products get introduced, there will be a need for custody solutions. BlockFi uses Gemini for custody and is introducing unique new crypto products such as savings and loans that will benefit those who want to hold crypto for the longer term.
The company is backed by some big hitters in the industry and has raised over $70 million in funding from the likes of Winklevoss capital, ConsenSys and Galaxy Digital.
Videos
Links
