$25 Million in 2 Weeks: BlockFi Booms as Bitcoin, Ether Investors Seek Interest

According to CEO and founder Zac Prince, users have already deposited more than $35 million worth of crypto, around 80 percent of it in bitcoin, into …

The Takeaway

  • BlockFi’s interest-yielding deposit accounts, launched in beta in January and fully live this month, have attracted more than $35 million in crypto. Most of it is being lent to institutional borrowers.
  • BlockFi’s terms of service give the company significant leeway over how it uses depositors’ funds and what interest rate it can pay them. This flexibility is needed for the company to grow fast, CEO Zac Prince says.
  • Institutional investors borrow crypto at individualized terms, at interest rates from 4 to 12 percent, and BlockFi can call in the loans at any time.
  • When crypto prices move dramatically, BlockFi manages risks by making borrowers put up more collateral or selling some of it.
  • BlockFi is planning to roll out new products every six months and raise more capital.

BlockFi wasn’t the first lending startup in the cryptocurrency market, but it’s likely the one getting the most attention these days — including some heat from community members.

While it was founded in 2017, and began making fiat loans with crypto collateral in January 2018, the company was thrust into the spotlight earlier this month when it officially launched an interest-bearing deposit account. Seemingly too good to be true, the product entices investors with returns of up to 6.2 percent annually for holding their bitcoin or either.

So far, the product seems to be gaining traction. According to CEO and founder Zac Prince, users have already deposited more than $35 million worth of crypto, around 80 percent of it in bitcoin, into their interest-bearing accounts since beta testing began in January. Of that, $25 million, was gathered after the March 5 launch.

Yet skeptics almost immediately began looking under the hood.

For example, lawyer Stephen Palley noted that, while BlockFi is advertising 6.2 percent, according to the product’s terms and conditions page, the company can modify the rate at its discretion. Others pointed out that, as the deposits won’t be insured as they would be at a bank, “your upside is limited to 6.2 percent whereas your downside is 100 percent” if BlockFi fails.

Wall Street veteran Caitlin Long noted that by depositing their crypto with BlockFi, people expose themselves to a form of counterparty risk: “I didn’t see disclosure on that,” she wrote, adding that by rehypothecating clients’ funds – that is, lending out collateral – BlockFi may be exposing itself to legal challenges in some U.S. states.

Given the controversial yet clear market interest in this product, CoinDesk sat down with Prince to talk about the company’s policies, how BlockFi’s business works, and, most importantly, how it manages risk.

Lending fiat, borrowing crypto

BlockFi is currently offering two products to retail customers: cryptocurrency-backed loans and crypto-funded interest accounts. With the loans, the customer borrows U.S. dollars for one year at 4.5 percent interest, depositing bitcoin, litecoin or ether as collateral. They can only borrow up to 50 percent of what the pledged crypto is worth at the time.

Meanwhile, with the interest account, the customer deposits bitcoin or ether with BlockFi so that the asset can accumulate interest (denominated in crypto) every month. As mentioned, BlockFi is advertising a 6.2 percent annual compound interest rate for such accounts, which is two to three times better than a U.S.Treasury bond or a U.S. bank saving account yield.

Image of BlockFi’s CEO Zac Prince by Anna Baydakova for CoinDesk

But again, the terms and conditions explicitly say that the interest will be calculated by BlockFi at its discretion.

When asked if there is any benchmark BlockFi uses to determine the interest rate (the way, for example, a bank might take into account an index like LIBOR when setting the rate on a loan), Prince answered simply: “No.”

The absence of any formula allows BlockFi to flexibly change the rate and make it more attractive to potential users, he said, explaining that for now, the product doesn’t make money:

The rate is a combination of the market and customer acquisition costs. This product will be for some amount of time, probably for for 3 to 18 months, a loss leader. We are OK with losing money for a while. If it was purely formulaic we probably wouldn’t have enough control to make sure it’s attractive enough to a large amount of people to hit our customer acquisition targets.”

To grow its user base quickly, BlockFi is planning to roll out new products every six months and to raise more capital. (It has already done several venture funding rounds, the largest one – led by Mike Novogratz’s Galaxy Digital – raising $52.2 million.)

Prince explained:

“We believe that we will be able to continue raising venture capital supporting the growth and at a certain point down the road [when] we’re a much bigger company, maybe we’re a public company, then we can say: ‘Ok, we turn to profit now.’ We anticipate being able to raise larger and larger amounts of venture capital for a while, at least for the next couple of years.”

…and lending crypto, too

The third thing BlockFi does, without advertising it to the retail market, is lend crypto to financial institutions. “We don’t really think of it being a product,” Prince said. “We think of this as of something we need to do to be able to deliver our product to our core customer, which is retail.”

This third element is what allows BlockFi to earn crypto that can be used to pay interest to its retail depositors. (The fiat loans are in a separate bucket, funded from the venture capital BlockFi raised.)

Most of the $35 million in deposits gathered is being lent to institutional borrowers: of every deposit, a bigger part goes to the lending business and a smaller part stays as a reserve, but the exact ratio is not disclosed.

Gemini Trust, founded by Cameron and Tyler Winklevoss, was chosen to handle custody for BlockFi’s clients, as well as the moving of crypto from the depositors to the institutional borrowers — BlockFi itself doesn’t hold the cryptographic private keys controlling the funds, Prince said.

Currently, BlockFi’s borrowers mostly belong to two groups, he said: people trading bitcoin futures and traditional financial institutions – in particular, proprietary trading firms and market makers.

The terms on which institutions borrow crypto vary on a case-by-case basis, Prince said. The interest rate can be between 4 and 12 percent, and the fiat collateral (which can be denominated in stablecoins, either the Gemini dollar or the Paxos Standard) can be between 110 and 150 percent of the loan amount. The relationships with borrowers are governed by individual ISDA agreements (the standard document governing over-the-counter derivatives transactions, made famous by the bestseller and movie “The Big Short“).

The term of the loan can vary, but BlockFi reserves the right to call in the loan with one’s week’s notice — the same amount of notice a depositor can give to withdraw crypto. This clause ensures the company will always have enough crypto to meet withdrawal requests, according to Prince.

Managing risk

So what happens when crypto prices move significantly (as they often do)?

When the price goes down, clients’ collateral will shrink, too, and the loan-to-value (LTV) ratio of the loans will rise from 50 percent to a higher number. On the other hand, if prices soar, institutional crypto borrowers will find their loans much more expensive to pay back. But according to Prince, BlockFi has taken several measures to mitigate these risks.

For the fiat loans, if at some point the amount of cash a retail client borrowed becomes equal to 70 percent of the collateral instead of 50 percent, to return to a safer LTV ratio, BlockFi will contact the client and give them 72 hours to either pay back the loan, add more collateral or take no action. Choosing the third option means BlockFi will sell a part of the collateral on an exchange or through an OTC desk, use it to pay down the loan, and get the LTV “back into the safe zone,” as the terms and conditions page puts it.

The same mechanism works for institutional investors that borrow crypto: if the price of bitcoin goes up, and what they borrowed ends up costing more relative to the amount of cash collateral, BlockFi will contact them and ask them to add more cash. If the bitcoin price hits a certain preset level, which also varies from borrower to borrower, BlockFi can use the collateral to buy bitcoin and close out the loan.

The terms for institutions, again, are highly dependent on the level of trust a particular client has. As Prince put it:

“If, say, JP Morgan wanted to borrow a million dollars from us, we probably wouldn’t need to take any collateral.”

Plus, the loans are structured so that if need be, BlockFi can chase after the deeper pockets behind a borrower. “We’re making sure that we have passed through to a parent entity if we’re facing a subsidiary, in terms of a default,” Prince said.

Legal and regulatory

In case the borrower defaults, taking them to court won’t be a problem, Prince believes.

“The legal structure we use to lend someone crypto is no different than we would use, say, to lend somebody USD secured by Japanese yen,” he said.

As for regulatory compliance, BlockFi is a licensed lender in the states that require this — the cash loans are now available in 47 U.S. states.

“The biggest state we don’t support is Nevada because it requires you to have an office in the state, which isn’t something we plan on doing in the near term,” BlockFi’s director of marketing Brad Michelson told CoinDesk. He wouldn’t name the other two excluded states.

As for the interest accounts, they are available worldwide, except the states of New York, Connecticut and Washington and in any countries sanctioned by the U.S., the U.K. or the E.U.

BlockFi doesn’t hold a New York State BitLicense, which explains why it lends but won’t take deposits there.

“For the crypto loans, we don’t believe we need a BitLicense,” Prince said. “For the interest accounts, we don’t believe we need one either, but our opinion on that is not strong enough for us to offer it here.”

Some of BlockFi’s state lending licenses on display at its office

The fine print

The terms and conditions on BlockFi’s website say that the company “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,” affording the lender significant leeway over its use of clients’ funds.

Further, users waive their rights to obtain a paper copy of the contract, file a class action against BlockFi or request a jury trial. The company also can change the terms at any time and it’s the user’s responsibility to review them “from time to time.”

Prince explained that what is described in the terms is just the real risk to a crypto investor, plainly stated.

“There is this conundrum that you’re put in: you have to be really, really careful in terms of what your agreement says to protect your company, because crypto is in this regulatory grey area,” he said. “The Catch-22 is you have lawyers, you disclose any risk, you’re trying to protect your company from the regulators, but that means you need to write stuff like this.”

He added:

“Scams don’t write stuff like this.”

As for rehypothecation, which Long and others consider antithetical to bitcoin’s promise, Prince argues it’s essential for the nascent crypto market to grow. One of the benefits of rehypothecation, he explained, is that it allows intermediaries to reduce trading fees and enable short selling.

“If you don’t have a market that goes both ways, you can’t find the true price of an asset. Rehypothecation is the major component enabling that,” he said.

At the end of the day, any investment is risky, and BlockFi is just being forthright about it, Prince argued, concluding:

“Read a risk disclosure of, say, an IPO, and maybe in the end you say: ‘This is the scariest thing ever, I’ll never invest in a stock again in my life!’”

Image of BlockFi’s CEO Zac Prince by Anna Baydakova for CoinDesk

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It Finally Happened: The State of Wyoming Passes 2 Crypto Bills — Who Will Benefit From That?

The rapid innovation of blockchain technology, including the growing use of virtual currency and digital assets, has resulted in many blockchain …

The U.S. State of Wyoming is quickly becoming the hotbed for crypto regulation in the country, with lawmakers now proposing 2 more bills for legislation, this time focused on legitimizing cryptocurrencies as an asset class. The bill, SF0125, recognizes “property rights in the direct ownership of digital assets.”

…classifying digital assets within existing laws; specifying that digital assets are property within the Uniform Commercial Code; authorizing security interests in digital assets; establishing an opt-in framework for banks to provide custodial services for digital asset property as custodians; specifying standards and procedures for custodial services under this act…, the bill reads.

Caitlin Long, member of the Wyoming Blockchain Coalition, publicized the news on Twitter:

1/ BOOM! #Wyoming just recognized clear, direct property rights for #digitalassets by passing SF125! This means #blockchain cos will prob want to apply WY law to your contracts, domicile here, &/or have a physical presence here. Thx again to the army of ppl who helped over months pic.twitter.com/I4E3GfPZbC

— Caitlin Long 🔑 (@CaitlinLong_) February 14, 2019

It makes perfect sense that Wyoming is the epicenter of blockchain law in the US. That’s also why institutional investors, which are prohibited by federal law from directly owning the assets they manage, can rest assured that Wyoming’s digital asset custodians are actually solvent, Long said.

Wyoming has been in the thick of things when it comes to blockchain-related regulation, with the state passing several laws in crypto since the new year began.

This new development joins the ratification of 2 laws passed only a few weeks ago. One law officially deemed cryptocurrencies as money. Shortly after, state authorities went a little further and recognized crypto as property.

While the U.S. is lagging behind other nations in terms of overall regulation, some states are taking up the mantle, keen to leverage the powers of blockchain. New Hampshire has proposed that Bitcoin be considered for state tax payments, while Colorado senators have introduced a “Digital Token Act” to exempt digital assets from securities laws.

Who Will Benefit From These Laws?

The 2 new bills will be passed on to Wyoming Governor Mark Gordon, and could become official by as early as next week.

The key point about this bill is the fact that it addresses property law, which states are allowed to determine.

The target audience of this new bill will primarily be individual and institutional investors. Now that digital assets are deemed as property, these entities can directly hold digital assets and not indirectly through an intermediary.

Long is optimistic that this change in legality could attract heavy institutional investment and blockchain companies to Wyoming.

All of these regulations that Wyoming is forming sets an example for other states to follow. Banks can operate with cryptocurrency more easily, while investors have less to be worried about when it comes to the legitimacy of cryptocurrency.

In the Twitter thread that followed the announcement, Long explains how the bill makes digital asset ownership easier and more direct:

In other words, you’re not forced to own digital securities through an intermediary. Blockchain tech enables direct ownership of assets, and now the law does too.” Since property law in the United States is in the hands of state jurisdiction, this new step is not only safe from the federal government but also can serve as a model for other states.

Indeed, the combination of making crypto legal tender and allowing banks to provide financial services with blockchain-based assets encourages innovation and work in the states. According to one of the bills:

The rapid innovation of blockchain technology, including the growing use of virtual currency and digital assets, has resulted in many blockchain innovators being unable to access secure and reliable banking services, hampering development of blockchain services and products in the marketplace.

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Wyoming passes two bills on crypto and blockchain

Wyoming is creating new ripples in the crypto sphere by passing two progressive blockchain associated bills. These bills are anticipated to be signed …

Wyoming is creating new ripples in the crypto sphere by passing two progressive blockchain associated bills. These bills are anticipated to be signed in the law by the Mark Gordon, the state’s Governor very soon.

The corporate stock token bill (HB0185) and the special-purpose depository institution (SPDI) bill (HB074) specifically are the bills, which firmly supports the cryptosystem of Wyoming as it builds up an understandable regulatory structure for cryptographic money shareholders and blockchain entrepreneurs.

Caitlin Long who is the Co-founder of Wyoming’s Blockchain Coalition talked on why the bills are progressive and why it’s a noteworthy move towards the complete crypto industry.

Caitlin Long also stated that one of the bills, the special-purpose depository institution (SPDI) is specifically essential. It takes care of the blockchain area’s concern of trouble acquiring basic US bank accounts that are of the dollar only, which not many banks offer to new businesses. Numerous apprehensive accounts of new companies closing down on the grounds those banks shut their accounts. However, those US organizations that lose their financial accounts go out of business.

Additionally, she said that, for instance, IRS requires holding back taxes that are to be paid automatically by means of financial accounts. It is perilous to the accomplishment of the blockchain area that more than a couple of banks serve the business for essential payroll/money/checking the management accounts.

SPDI, which is the first bill, assist the blockchain entrepreneurs presently in danger of getting their financial accounts closed. The second bill is the corporate stock token bill, which makes it feasible for companies to provide tokenized stocks rather than paper stock declarations.

She further added that this bill makes a non-loaning, state-contracted and a hundred percent (100%) retain the depository institutions for the corporation only. Importantly the SPDs’ bills are not FDIC assured.

Due to this step, Wyoming has set up itself as an innovator in the US about building up clear rules and structure for the blockchain business.

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Once a Major Supporter of Blockchain Technology, Arizona May Impose Bill That Taxes …

… adding to a former definition of a “marketplace facilitator, adding any company that provides “a virtual currency that buyers are allowed or required to …
Once a Major Supporter of Blockchain Technology, Arizona May Impose Bill That Taxes Development

Arizona has passed multiple bills in the last few months that have promoted the blockchain, like HB 2417 in March 2017. This bill essentially legalized the use of blockchain technology for signatures in electronic documents, stating that the legality cannot be denied in any case. Following an April 2017 bill to use blockchain to track gun registration, they passed two more bills a year later that outlined “virtual coin offering” regulations.

A newly proposed bill in Arizona, HB 2702, would amend the former bill, adding to a former definition of a “marketplace facilitator, adding any company that provides “a virtual currency that buyers are allowed or required to use to purchase products from the seller.” As such, they would be subjected to a sales tax from retailers without “a physical presence in their state.”

Attention was brought to the changes proposed in the bill by Caitlin Long, a Wall Street veteran and supporter of crypto, on Twitter. She posted a reply to Drew Hinkes. Hinkes started the conversation, saying,

“#Arizona, come on down! You’re the next state to propose a bill to impose sales tax on marketplace facilitators who require/allow #virtualcurrencies to be used by purchasers to buy products from sellers. Includes the broad ‘software development’ clause flagged by @CaitlinLong”

In response, Long said,

“ANOTHER ONE—UGH!!! #Arizona was previously one of the #blockchain friendliest US states, but if this bill becomes law it will join #RhodeIsland & #NewYork as the worst. HOW DARE YOU TAX SOFTWARE DEVELOPMENT AND R&D??? #idiotic”

In the past, Long has supported regulating and legalizing blockchain regulations at a state level. Rhode Island recently introduced a potential bill that will require taxation on blockchain technology progress.

Long has been working within Wyoming to create a more welcoming climate for cryptocurrency and blockchain technology, and it is clear that she sees the actions in Rhode Island as being completely against that. Referencing the proposal on Twitter a few days ago, she says that the proposal on taxes is “so broad that it includes taxing software development and + R&D. Get out of states that show by actions they don’t want #blockchain cos & come to #Wyoming where we do!”

ANOTHER ONE—UGH!!! #Arizona was previously one of the #blockchain friendliest US states, but if this bill becomes law it will join #RhodeIsland & #NewYork as the worst. HOW DARE YOU TAX SOFTWARE DEVELOPMENT AND R&D??? #idiotic@propelforward@Tyler_Lindholmhttps://t.co/x4AvIdVt8g

— Caitlin Long 🔑 (@CaitlinLong_) February 12, 2019

State Legislature of Wyoming Passes Two New Crypto and Blockchain Related Bills

The bill is titled the Financial Technology Sandbox bill – and in addition to setting up the said safe-space, the bill also looks towards waiving off certain …

Two new house bills have been approved and passed by the State Legislature of Wyoming, which deal with creating a suitable environment to promote innovations and regulations in the cryptocurrency and the blockchain industries. Wyoming has been a blockchain friendly state for quite some time now – and this comes as another major step forward towards this direction.

These two bills are the House Bill 57 and House Bill 62. Caitlin Long, the President of the Wyoming Blockchain Association was among the first ones to announce these two bills being passed via Twitter. House Bill 62 was passed with a majority of 8-1 while House Bill 57 was passed with a unanimous 9-0 majority. Let us take a closer look at each of the two bills that got passed:

House Bill 57 deals with providing a safe-space for startups working in the blockchain and cryptocurrency industries where they can experiment with this gen-next technology. The bill is titled the Financial Technology Sandbox bill – and in addition to setting up the said safe-space, the bill also looks towards waiving off certain rules and regulations which may hinder these efforts towards innovation in the technology.

The second bill, House Bill 62, is titled ‘Wyoming Utility Token Act-Property Amendments Bill’. This bill is aimed more towards the regulation of the industry and brings in some legal clarity into classifications. The bill defines that all blockchain tokens are an ‘intangible personal property’ and that they do not need to be exempted from federal securities laws. Here’s an extract from the bill:

“The open blockchain tokens governed by this act do not constitute securities because a person who is sold a consumptive open blockchain token cannot receive a cash payment or share of profits from a developer or business, but will instead receive a fixed amount of consumable services, content or property.”

Wyoming has become one of the most attractive places in the US when it comes to cryptocurrency and blockchain firms. The state has had many progressive bills and laws being passed over the past few months. The state of Wyoming is also testing getting their land records stored over blockchain systems – a pilot project that has been started off in Teton County.

Last year, IOHK, the parent company of Cardano had announced its decision to move out of Hong Kong and relocate to Wyoming. Cardano is among one of the most successful cryptocurrencies (currently the 11th largest by market cap), and its parent firm moving to Wyoming is another testament to the success of the pro-blockchain regulations of the state.

Progressive regulations like these are making their way into several states in the US. Tulsi Gabbard, who has officially announced her name for the 2020 Presidential Elections is another major names in US politics to support cryptocurrencies. With more and more pro-crypto regulators joining the political system, it appears that the next crypto boom might come from the White House!

Stay tuned with us at Cryptoground for regular news updates and more stories from the world of cryptocurrencies and the blockchain technology.

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