BlockFi Receives $25 Million in Crypto Deposits in Just 2 Weeks After Launching Lending Products

BlockFi Lending LLC, a New York-based “secured non-bank lender” that provides cryptocurrency-backed loans in USD to digital asset investors, has revealed that its interest-generating deposit accounts have received over $25 million in cryptocurrency.

Notably, the commercial and consumer lending firm has managed to attract millions of dollars in deposits in only a relatively short period of time - as its interest-yielding crypto accounts were officially launched just two weeks back.

BlockFi's TOS Reveal It Can Decide How It Wants To Use Customers' Deposits & Control Rate Of Interest

According to Zac Prince, BlockFi’s CEO, the company’s terms of services (TOS) have been created specifically to allow the company to operate in a flexible manner. Prince explained that BlockFi is able to decide, for the most part, how it intends to use depositors’ crypto funds and it can also determine how much in interest payments it should pay them. This, Prince said, was necessary as the firm is currently looking to expand its line of products and services.

As detailed in BlockFi’s TOS, the company’s interest payments range from 4 to 12% and it can request that the loans be returned at any given time. In order to hedge against price volatility in the cryptocurrency market, BlockFi requires that borrowers provide more collateral or sell a portion of it.

Launched in August 2017, BlockFi’s management is currently developing other crypto-related products and it is also looking to raise more funds. As noted on Crunchbase, BlockFi has received $95.4 million in total funding (to date).

Users Can Borrow Up To 50% Of How Much Crypto They Put Up In Collateral

The Manhattan, New York-based lender offers two different lending products to retail investors. These include digital asset-backed loans and crypto-funded interest-generating accounts. BlockFi’s loans-based product allows users to borrow in USD for a 1 year period at a 4.5% interest rate while depositing bitcoin (BTC), ether (ETH), and/or litecoin (LTC) as collateral. At present, users can only borrow up to 50% of what they’ve put up as collateral.

BlockFi’s interest account lets customers make deposits in ETH or BTC and issues interest payments at a rate of 6.2%, which is compounded annually. Notably, this rate is up to 3x more than what’s currently being offered by US-based certificate of deposits (CDs) and it’s also significantly more than the current rate quoted by US Treasury bonds. However, customers are also taking on a lot more risk with BlockFi’s crypto-based lending solutions.

High Level Of Risk Involved

Commenting on the high risk involved in using BlockFi’s products, Caitlin Long, an experienced Wall Street professional who’s now focused on the crypto and blockchain space, remarked (via Twitter): 

I wonder how many customers understand the counterparty risk they're taking on--I didn't see disclosure on that.

In response to a question about whether BlockFi determines its return rate (on loans) based on a set formula, Prince said the company had not established criteria for that as he revealed its products are not yet profitable. He told Coindesk:

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.

Before launching these crypto lending options, Prince had published an article (on LinkedIn in February 2018), noting:

For the first time, a financial asset has been created that is both natively digital and global. A market around these assets and the technology that underpins them, blockchain, is growing rapidly. This innovation creates the opportunity for lenders to assign a global price to digital assets and underwrite risk similarly for borrowers, regardless of the country in which the borrower resides. As a result, there is an opportunity to extend low cost credit in markets where it previously was not available and grow access to a critical part of banking infrastructure that could expand global economic activity dramatically.

CME Looks to Double Bitcoin Futures Limit, but Is This Wise?

The Chicago Mercantile Exchange (CME) has a new request for its regulator, as it looks to double open position limits on bitcoin futures contracts in the face of significant interest.

Nasdaq reports that the CME has already petitioned its regulatory body, the Commodity Futures Trading Commission (CTFC), asking for an increase from 1000 contracts per spot month to 2000 per investor. Each contract represents five BTC, so essentially, at its peak,  a single investor's total position may edge towards a monumental 10,000 BTC.

This is in direct response to the contract's recent growth which is currently depicting record levels of activity, citing $370 million being traded per day. A spokesperson for the CME noted that the idea to increase limits was proposed on the continued maturity of the market:

Based on the significant growth and acceptance of our financially-settled CME Bitcoin futures markets, as well as our analysis of the underlying bitcoin market.

However, as Nasdaq writes the increase in the upper limit of positions is somewhat superfluous. As of July, the number of open interest contracts reached an all-time high of just 6100; given this, it seems the CME may be future-proofing.

Open to Manipulation?

However, concerns remain about the limit increase, as without them, the potential for manipulation rises; often to the detriment to the underlying asset. Although, as per the CTFC website, the threat of manipulation from bitcoin futures contracts is "low":

In general, position limits are not needed for markets where the threat of market manipulation is non-existent or very low.

Instead, Nasdaq posited that this might point to a lessening on the CTFC's strict rule of bitcoin; as well as a maturing of the market in general.

Nevertheless, some believe the CME's bitcoin futures contracts do pose a significant threat to the price of BTC; with some suggesting that blatant manipulation continues unchecked within the market.

As reported, there seems to be a correlation between the expiry dates of CME bitcoin futures contracts and a lull in the price point of BTC. In several instances, a significant drop in bitcoin's price has coincided with a closure from the CME. The most recent example of this occurred on Labor Day, September 2, when bitcoin rose an extraordinary 8% shortly after the CME shut.

Crypto analyst, Alex Kruger, highlighted this, noting the large gaps which formed on the CME chart, from the price discrepancy before and after closing.

This has become a pretty accepted practice within the market. Kruger has even gone to the lengths of compiling statistics each time this phenomenon transpired:

On these occasions, bitcoin cited an average 4.6% price discrepancy following the close of the CME.

Whether this is a coincidence or the market is indeed being actively manipulated is as yet unclear. Either way, with the increase of these limits it might be only a matter of time until we know for sure.

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