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Is BlockFi a scam though? Fraud is not what they are getting fined for, and it sounds like they can continue to operate if they meet these reporting requirement

Is BlockFi a scam though? Fraud is not what they are getting fined for, and it sounds like they can continue to operate if they meet these reporting requirements, and that the company intends to do that.

Animats 5y ago
They misrepresented how their assets were collateralized, creating a false impression of safety. That's fraud.
- deleted 5y ago
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- deleted 5y ago
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sbierwagen 5y ago
Check out the interest rates on their crypto accounts: https://blockfi.com/rates/ https://blockfi.com/rates/ A guaranteed 9.25% APY on crypto deposits when US dollar savings accounts at FDIC banks do 0.50% is odd. Where is the extra money coming from?
- ar_lan 5y ago
  If you check DeFi rates, 9.25% is fairly low currently.
  - joelbondurant1 5y ago
- thebean11 5y ago
  According to them they lend the money out to institutions and traders. Margin rates can be pretty high.
  - AlexandrB 5y ago
    That's how banks make money too. However, banks must also consider the risk of their debtors defaulting on their loans. They pass those risks on to you in the form of very low interests rates on money deposited, while keeping your deposit "safe". It seems like BlockFi was passing the risk on in the form of an undisclosed risk of losing all your money. That's the part the SEC seems to have a problem with: > The order also finds that BlockFi made a false and misleading statement for more than two years on its website concerning the level of risk in its loan portfolio and lending activity. The point is there's no free lunch. If you're making 9+% on your deposit don't be surprised if your account is wiped out when BlockFi's debtors fail to pay.
- Animats 5y ago
  And that is why S-1 filings exist - to provide the answer to such questions. Somewhere, for this to work, there must be people paying more than 9.25% to borrow money. Who are they? What collateral are they putting up? Whatever the borrowers are doing must be high risk, or they wouldn't be paying interest that high. In effect, this is a junk bond they're selling - high interest, with a high chance of losing the principal. Those are semi-legitimate financial products (but see Michael Milliken). However, if you invest in junk bonds, you have to evaluate them, and you don't own just one. You own a broad portfolio of them, collateralized by different things, expecting some of them to fail and some to succeed. This is why there are junk bond funds. Some of which fail, because too many of the risks were correlated. If someone in the DeFi sector is selling this, the funds are probably being used to finance some other crypto-related scheme. Not building a factory or an apartment building, which you could probably finance at 3-4% right now. So you're probably buying into a speculation that some crypto product goes up. You're buying with a capped upside, an uncapped downside, and no visibility into the risks.
  - cwp 5y ago
    Well, the downside is capped at "you lose all the money you invested". I think. Did I miss something?
    - hermitdev 5y ago
      In general, yeah, you're capped at everything you invested basically ceasing to exist. Unless you bought on margin. Then, you can end up owing money, even if the asset is worthless. Not crypto related, but one of the things that made the financial collapse of 2008 so much worse were the number of institutions that were over leveraged at the time and couldn't make the margin calls when assets started tanking. The fund I worked for at the time was leveraged as high as 40:1 at one point around that period. We exited the crisis leveraged closer to 10:1. The problem with firms being overleveraged is when the margin call comes, it starts a snowball effect. To make the margin call, you have to liquidate assets, most likely at a loss, which further drives asset prices in the market down, increasing margin requirements in a vicious feedback loop. It's not uncommon for a firm hit with a big margin call like this to end up having to sell everything for pennies on the dollar. I won't name names, but I worked a few high profile blowups during my tenure in finance, one of which was the very high profile bankruptcy of one of the banks that was allowed to fail in the US another was a boutique hedge fund that doubled down on a bad energy bet. Neither was pretty. But, in both cases, the root cause was the same: failure to properly understand the risk of the investments they were making either in part or in whole. Data quality in the risk system at the large bank was especially atrocious, BTW.

Animats 5y ago

They misrepresented how their assets were collateralized, creating a false impression of safety. That's fraud.

deleted 5y ago
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deleted 5y ago
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sbierwagen 5y ago

Check out the interest rates on their crypto accounts: https://blockfi.com/rates/ https://blockfi.com/rates/ A guaranteed 9.25% APY on crypto deposits when US dollar savings accounts at FDIC banks do 0.50% is odd. Where is the extra money coming from?

ar_lan 5y ago
If you check DeFi rates, 9.25% is fairly low currently.
- joelbondurant1 5y ago
thebean11 5y ago
According to them they lend the money out to institutions and traders. Margin rates can be pretty high.
- AlexandrB 5y ago
  That's how banks make money too. However, banks must also consider the risk of their debtors defaulting on their loans. They pass those risks on to you in the form of very low interests rates on money deposited, while keeping your deposit "safe". It seems like BlockFi was passing the risk on in the form of an undisclosed risk of losing all your money. That's the part the SEC seems to have a problem with: > The order also finds that BlockFi made a false and misleading statement for more than two years on its website concerning the level of risk in its loan portfolio and lending activity. The point is there's no free lunch. If you're making 9+% on your deposit don't be surprised if your account is wiped out when BlockFi's debtors fail to pay.
Animats 5y ago
And that is why S-1 filings exist - to provide the answer to such questions. Somewhere, for this to work, there must be people paying more than 9.25% to borrow money. Who are they? What collateral are they putting up? Whatever the borrowers are doing must be high risk, or they wouldn't be paying interest that high. In effect, this is a junk bond they're selling - high interest, with a high chance of losing the principal. Those are semi-legitimate financial products (but see Michael Milliken). However, if you invest in junk bonds, you have to evaluate them, and you don't own just one. You own a broad portfolio of them, collateralized by different things, expecting some of them to fail and some to succeed. This is why there are junk bond funds. Some of which fail, because too many of the risks were correlated. If someone in the DeFi sector is selling this, the funds are probably being used to finance some other crypto-related scheme. Not building a factory or an apartment building, which you could probably finance at 3-4% right now. So you're probably buying into a speculation that some crypto product goes up. You're buying with a capped upside, an uncapped downside, and no visibility into the risks.
- cwp 5y ago
  Well, the downside is capped at "you lose all the money you invested". I think. Did I miss something?
  - hermitdev 5y ago
    In general, yeah, you're capped at everything you invested basically ceasing to exist. Unless you bought on margin. Then, you can end up owing money, even if the asset is worthless. Not crypto related, but one of the things that made the financial collapse of 2008 so much worse were the number of institutions that were over leveraged at the time and couldn't make the margin calls when assets started tanking. The fund I worked for at the time was leveraged as high as 40:1 at one point around that period. We exited the crisis leveraged closer to 10:1. The problem with firms being overleveraged is when the margin call comes, it starts a snowball effect. To make the margin call, you have to liquidate assets, most likely at a loss, which further drives asset prices in the market down, increasing margin requirements in a vicious feedback loop. It's not uncommon for a firm hit with a big margin call like this to end up having to sell everything for pennies on the dollar. I won't name names, but I worked a few high profile blowups during my tenure in finance, one of which was the very high profile bankruptcy of one of the banks that was allowed to fail in the US another was a boutique hedge fund that doubled down on a bad energy bet. Neither was pretty. But, in both cases, the root cause was the same: failure to properly understand the risk of the investments they were making either in part or in whole. Data quality in the risk system at the large bank was especially atrocious, BTW.