A preliminary report titled “Why did BlockFi fail?” filed with the United States Bankruptcy Court for the District of New Jersey on July 14, 2023, has shed light on the reasons behind the failure of BlockFi, a prominent crypto-lending company. The report was presented by the Official Committee of Unsecured Creditors and involves various entities associated with BlockFi.

According to the report, BlockFi’s failure can be attributed to fundamentally flawed business models, unreasonable risk-taking, and ignored concerns of the management team. The document also provides a timeline of the events leading up to BlockFi’s collapse and discusses the key individuals and entities involved in the case.

Zac Prince, the CEO of BlockFi, allegedly ignored the recommendations of the company’s risk management team about lending assets to Alameda Research. The risk management team had reported “high risks” associated with lending assets to Alameda, but Prince reportedly dismissed these concerns. By August 2021, BlockFi had loaned Alameda $217 million, despite warnings from the risk management team about the potential risks if the FTX token (FTT) used to secure the loans were to be liquidated.

The report also reveals that BlockFi had approximately $1.2 billion in assets tied to FTX and Alameda Research when the company filed for bankruptcy in November 2022. At the time of the Chapter 11 filing, BlockFi admitted it had “significant exposure” to FTX and its partners. entities. FTX US had received a $400 million credit line from BlockFi in July 2022, boosting financial ties between the two companies in the midst of a crypto winter.

The report suggests that while the fall of Alameda/FTX may have triggered the fall of BlockFi, BlockFi’s demise was based on business practices and decisions that long preceded Alameda/FTX’s bankruptcy filing.

In response to the report, a BlockFi spokesperson said the company disagreed with the report, claiming that the committee behind the report “picks statements out of context, errs on other matters, and fails to deliver the promised objective analysis.”

The document also delves into the promises made to customers, the company’s corporate guidelines, failures in supervisory functions and failures in investments. The report’s findings highlight the importance of strong risk management and the potential consequences of ignoring such systems in the rapidly evolving crypto industry.

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