6 ms·

Someone gets a Blockfi loan for a mortgage, loses over $300K

14 points by bb88 5y ago

cuteboy19 5y ago
I still don't understand the point of DeFi, if he had 300k worth of Bitcoin, then why not just sell it? Why take a loan with the Bitcoin as collateral? Isn't Bitcoin supposedly very liquid?
- ComradePhil 5y ago
  I assume it was for tax reasons.
- HWR_14 5y ago
  I imagine the reasons are related to either recognizing capital gains or to speculate that bitcoin would keep going up in value and he could sell less of it to settle his debt.
- numtel 5y ago
  Blockfi isn't defi. If they had used defi, like aave, they would have avoided this whole situation.
  - cuteboy19 5y ago
    That is basically unrelated to my question
bb88 5y ago
What apparently happened is that the user took a Blockfi loan against his BTC holdings. When the bank subsequently learned the bitcoins were tainted from a BTC tumbler, they recalled the loan. He took the loan at when BTC was $65k. They recalled the loan at $37k.
gizmo686 5y ago
It seems like most of this story is just general poor financial decisions, with a hint of cryptocurrency aftertaste. 1) Person took out a $300k margin loan with a margin ratio of 50%. Under current regulations, 50% is the most aggressive you are allowed to go when taking out a margin loan. [0] This margin loan was taken out against a volatile collateral, which means that one should be much more conservative in how much margin is taken. As a result of this, the person was forced to put up additional collateral due to market fluctuations. Thus far, the story is simply "idiot plays with margin", which is a tale far older than cryptocurrency. 2) Person took out a $300k loan in order to convince a bank that they should qualify for a mortgage. This is either fraud, or not understanding how the underwriting process works. I suspect the latter, since I don't see how the fraud is supposed to work. Any competent underwriter will ask where the $300k came from. The person needs either a convincing lie or to disclose that the $300k came from a margin loan against an asset that the bank does not consider; and which would be promptly converted back into said asset as soon as the bank stops looking. Lieing might work if you are convincing, but that is simply fraud. The truth is legal, but probably makes you even less attractive to the lender than you started out as. 3) The person took out a margin loan with a non-standard condition that allowed the lender to close the position for <crypto-specific gobbledy-gook>. Since this happened to occur when the market of the collateral was down, this had the same effect as the person being unable to make a margin call: their assets were sold at a low price. On the plus side, apart from the tax implications, that $300k USD is now simply cash in the persons bank account, so he shouldn't have any problems getting the underwriter to look at it as an asset now. Although, to the extant that the underwriter gets to use human judgement, this probably looks worse than simply selling $300k USD worth of BTC in the first place EDIT: Person was given the opportunity to pay back the loan in USD [1], but choose not to due to the pending mortgage. Depending on where he was in the process, backing out of the mortgage and home purchase wouldn't be cheap, but it would be far under $300k. The real cost of this situation should be measured by the cost of backing out of the home purchase; and this person made the decision that that was more expensive than loosing the BTC. [1] https://www.reddit.com/r/CryptoCurrency/comments/skxpr7/blockfi_horrible_loan_experience_fortune_lost/hvnr6s7/ https://www.reddit.com/r/CryptoCurrency/comments/skxpr7/bloc... [0] https://www.investopedia.com/terms/i/initialmargin.asp https://www.investopedia.com/terms/i/initialmargin.asp
- pipodeclown 5y ago
  I wouldn't see the BTC being closed out as a cost per se. Total value of assets hasn't changed he's now simply holding a bit more of his assets in cash.
tsujp 5y ago
Someone violated the terms of the lending platform and had their loan recalled. This is no different to lying to your bank that you got that new $10,000 deposit from selling ice cream (taxable income) instead of selling your car (stamp duty and capital gains) then having the loan made with that capital recalled. The only difference is this involved crypto from a tumbler (to obfuscate the origin of the Bitcoin in this case).
- HWR_14 5y ago
  I don't recall a bank ever asking for the source of a deposit. And every bank makes it clear you are responsible for your own taxes and tax advice.
  - tsujp 5y ago
    So you’re saying that for a mortgage loan, or a credit card application, or a personal loan, or a car loan that a bank will never ask you: Q1: What is your job? Q2: What is your income/year? Q3: Where is your proof of income? (pay slips, bank statements, financial records) And that if you lie about any of these it has no effect whatsoever?
    - jakupovic 5y ago
      Let's just say that most people on HN don't know what they are talking about but pretend they do.
    - HWR_14 5y ago
      I'm responding to someone concerned with tax treatments for income types being the banks concern. If you want to say that your mortgage originator asks about it, okay. But not the bank you are depositing in.
  - gizmo686 5y ago
    When you apply for a mortgage, they absolutely need you to justify recent large deposits. This caused me a slight headache when I applied for a mortgage, as I had moved all the money I would need into 1 account before the underwriter approved the loan. I just had to provide documentation from the source banks that I was the source of the transfer and everything was fine; but I was advised that in the future, it is easier to apply with your money where it is, then consolidate it after you are verified. This also comes up with gifts, where the lender needs a signed statement from the giver that it is a gift, not a loan. E.G. to prevent exactly what the person in this story was trying to do. I suspect there is also an anti money laundering component to this requirement as well.

14 points by bb88 5y ago

I still don't understand the point of DeFi, if he had 300k worth of Bitcoin, then why not just sell it? Why take a loan with the Bitcoin as collateral? Isn't Bitcoin supposedly very liquid?

ComradePhil 5y ago
I assume it was for tax reasons.
HWR_14 5y ago
I imagine the reasons are related to either recognizing capital gains or to speculate that bitcoin would keep going up in value and he could sell less of it to settle his debt.
numtel 5y ago
Blockfi isn't defi. If they had used defi, like aave, they would have avoided this whole situation.
- cuteboy19 5y ago
  That is basically unrelated to my question

bb88 5y ago

What apparently happened is that the user took a Blockfi loan against his BTC holdings. When the bank subsequently learned the bitcoins were tainted from a BTC tumbler, they recalled the loan. He took the loan at when BTC was $65k. They recalled the loan at $37k.

gizmo686 5y ago

It seems like most of this story is just general poor financial decisions, with a hint of cryptocurrency aftertaste. 1) Person took out a $300k margin loan with a margin ratio of 50%. Under current regulations, 50% is the most aggressive you are allowed to go when taking out a margin loan. [0] This margin loan was taken out against a volatile collateral, which means that one should be much more conservative in how much margin is taken. As a result of this, the person was forced to put up additional collateral due to market fluctuations. Thus far, the story is simply "idiot plays with margin", which is a tale far older than cryptocurrency. 2) Person took out a $300k loan in order to convince a bank that they should qualify for a mortgage. This is either fraud, or not understanding how the underwriting process works. I suspect the latter, since I don't see how the fraud is supposed to work. Any competent underwriter will ask where the $300k came from. The person needs either a convincing lie or to disclose that the $300k came from a margin loan against an asset that the bank does not consider; and which would be promptly converted back into said asset as soon as the bank stops looking. Lieing might work if you are convincing, but that is simply fraud. The truth is legal, but probably makes you even less attractive to the lender than you started out as. 3) The person took out a margin loan with a non-standard condition that allowed the lender to close the position for <crypto-specific gobbledy-gook>. Since this happened to occur when the market of the collateral was down, this had the same effect as the person being unable to make a margin call: their assets were sold at a low price. On the plus side, apart from the tax implications, that $300k USD is now simply cash in the persons bank account, so he shouldn't have any problems getting the underwriter to look at it as an asset now. Although, to the extant that the underwriter gets to use human judgement, this probably looks worse than simply selling $300k USD worth of BTC in the first place EDIT: Person was given the opportunity to pay back the loan in USD [1], but choose not to due to the pending mortgage. Depending on where he was in the process, backing out of the mortgage and home purchase wouldn't be cheap, but it would be far under $300k. The real cost of this situation should be measured by the cost of backing out of the home purchase; and this person made the decision that that was more expensive than loosing the BTC. [1] https://www.reddit.com/r/CryptoCurrency/comments/skxpr7/blockfi_horrible_loan_experience_fortune_lost/hvnr6s7/ https://www.reddit.com/r/CryptoCurrency/comments/skxpr7/bloc... [0] https://www.investopedia.com/terms/i/initialmargin.asp https://www.investopedia.com/terms/i/initialmargin.asp

pipodeclown 5y ago
I wouldn't see the BTC being closed out as a cost per se. Total value of assets hasn't changed he's now simply holding a bit more of his assets in cash.

tsujp 5y ago

Someone violated the terms of the lending platform and had their loan recalled. This is no different to lying to your bank that you got that new $10,000 deposit from selling ice cream (taxable income) instead of selling your car (stamp duty and capital gains) then having the loan made with that capital recalled. The only difference is this involved crypto from a tumbler (to obfuscate the origin of the Bitcoin in this case).

HWR_14 5y ago
I don't recall a bank ever asking for the source of a deposit. And every bank makes it clear you are responsible for your own taxes and tax advice.
- tsujp 5y ago
  So you’re saying that for a mortgage loan, or a credit card application, or a personal loan, or a car loan that a bank will never ask you: Q1: What is your job? Q2: What is your income/year? Q3: Where is your proof of income? (pay slips, bank statements, financial records) And that if you lie about any of these it has no effect whatsoever?
  - jakupovic 5y ago
    Let's just say that most people on HN don't know what they are talking about but pretend they do.
  - HWR_14 5y ago
    I'm responding to someone concerned with tax treatments for income types being the banks concern. If you want to say that your mortgage originator asks about it, okay. But not the bank you are depositing in.
- gizmo686 5y ago
  When you apply for a mortgage, they absolutely need you to justify recent large deposits. This caused me a slight headache when I applied for a mortgage, as I had moved all the money I would need into 1 account before the underwriter approved the loan. I just had to provide documentation from the source banks that I was the source of the transfer and everything was fine; but I was advised that in the future, it is easier to apply with your money where it is, then consolidate it after you are verified. This also comes up with gifts, where the lender needs a signed statement from the giver that it is a gift, not a loan. E.G. to prevent exactly what the person in this story was trying to do. I suspect there is also an anti money laundering component to this requirement as well.