Sharks Are Circling BlockFi

There’s currently a tug-of-war going on for crypto lender BlockFi. But before we get to the juicy bits, let’s quickly back up and take a look at a timeline of events for the company over the past year or so:

• March 2021: BlockFi raises $350 million in Series D funding round at a $3 billion valuation

• July 2021: BlockFi is reportedly “days away” from closing a $500 million Series E at $5 billion valuation and is pursuing plans to go public

• February 2022: BlockFi pays $100 million to the SEC to settle investigations into its interest-generating accounts

• May 7-12, 2022: Terra/Luna blow up occurs

• June 6, 2022: BlockFi attempts to raise down round at $1 billion valuation

• June 12, 2022: Celsius pauses withdrawals; BlockFi CEO states: “Our risk management systems are operating normally”

• June 13, 2022: BlockFi cuts staff by 20%

• June 16, 2022: Financial Times reports that Three Arrows Capital fails to meet margin calls

• June 21, 2022: BlockFi receives $250M credit facility from FTX to bolster balance sheet due to exposure to Three Arrows

Okay, now that we have that out of the way, let’s take a look at what’s occurred in the last week.

Days after giving BlockFi the $250 million line of credit, the Wall Street Journal reported that FTX was also in talks to acquire a large stake in company.

The FTX and BlockFi deal comes with a catch though. According to a leaked call from investment firm Morgan Creek Digital, which led BlockFi’s $50 million series C fundraising round, the deal would provide FTX the option to buy BlockFi “at essentially zero price.”

If FTX were to exercise the rumored option, it would wipe out all of BlockFi’s existing shareholders, including management, employees with stock options, and all investors from previous rounds.

Why would BlockFi take this deal? 

Well according to the leaked call, of the several emergency financing offers BlockFi received, FTX’s offer was the only one that would not subordinate client assets to the rescuer.

As SBF tweeted: “Backstopping customer assets should always be primary. Everything else is secondary.”

Now, many existing (smaller) shareholders seem happy to put customer deposits over equity holders, but still, we’re sure they’d like to figure out a solution where they aren’t wiped out.

Therefore, in response to the potential FTX deal, Morgan Creek set up emergency calls to figure out a way to counter the FTX deal. According to the leaked call, BlockFi is currently being valued at less than $500 million, so one would assume Morgan Creek needs to come up with a competitive $250 million to take control.

Our Take:

Once again, there seems to be just too much leverage and contagion in the system…

Although it hurts to see a company like BlockFi have issues, and venture investors potentially being wiped out, we are glad to see that there is major concern first and foremost for customer deposits.

Remember, in crypto there isn’t an FDIC backing up your deposits.What ultimately unfolds with the BlockFi fiasco will have a lasting effect for everyone in the ecosystem.