One of our core values is “Transparency Builds Trust”. BlockFi publishes quarterly updates of assets on our platform and how we manage related liquidity and credit risk.
We provide all of our clients a non-interest bearing account to store supported digital assets (the “Wallet”). Digital assets transferred to a Wallet account are not deployed by us for our revenue generating activities and are instead held in either wallets we control, or with our custodial partners. The Wallet also lets our clients use our other products and services, such as: (i) opening crypto-interest-earning accounts; (ii) trading digital assets through our platform, (iii) receiving US dollar and stablecoin loans secured by digital assets, and (iv) receiving digital asset rewards through the BlockFi Rewards Visa® Signature Card. As of June 30, 2022, the fair value of digital assets (including stablecoins) in Wallet accounts was approximately $0.5 billion.
BlockFi Interest Account and BlockFi Personalized Yield
Our non-US clients have the option to transfer supported digital assets to a crypto-interest-bearing BlockFi Interest Account (“BIA”). As of February 14, 2022, our US clients can no longer transfer supported digital assets to a BIA. US clients with BIAs that existed prior to February 14, 2022 can maintain their BIAs, receive crypto interest, and redeem as in the past, but they can no longer add new assets to their BIAs.
We also borrow digital assets from clients pursuant to individually-negotiated borrowing arrangements that are negotiated to accommodate a client’s objectives, including through BlockFi Personalized Yield (“BPY”).
Digital assets transferred to BlockFi through a BIA or BPY or other type of individually-negotiated borrowing arrangement are used for our revenue-generating activities in the digital asset markets, which currently consist primarily of activities relating to lending to our retail and institutional clients and facilitating digital asset trading on behalf of our retail and institutional clients. Specifically, we may, at our discretion, pledge, repledge, hypothecate, rehypothecate, sell, lend, or otherwise transfer, invest, or use any amount of digital assets transferred to us separately or together with other property, with all attendant rights of ownership, and for any period of time and without retaining in our possession and/or control a like amount of digital assets. If we choose not to deploy certain digital assets, we store those digital assets using various custodians, exchanges, and wallet providers.
If a client transfers digital assets to us through a BIA or a BPY or other type of individually-negotiated borrowing arrangement, and then elects to use such assets as collateral in connection with a loan we make to the client, such assets will cease to earn crypto interest in the client’s account. Once a client has repaid the loan in full, the client can elect to have the digital assets used as loan collateral transferred back to its crypto-interest-earning account.
BlockFi’s core value is Transparency Builds Trust—which is paramount to maintaining and expanding our clients’ trust. As such, we view risk management as key to our success. We seek to monitor and control our risk exposure through an enterprise risk management framework, including by managing liquidity and credit risks that could potentially impact our obligations to clients that have a BIA, or with whom we have a BPY or other type of individually-negotiated borrowing arrangement.
We seek to maintain the liquidity necessary to meet all our obligations under our core business activities, which includes institutional and retail borrowing and trading activities. We seek to maintain sufficient levels of short-term assets to meet client redemption and payback obligations, as well as to support trading activity, by keeping sufficient balances in inventory.
We have established the following guidelines to manage our liquidity risks and available balances of short- term assets:
- We will hold at least 10% of total amounts due to clients upon demand in inventory, ready to be returned to clients.
- We aim to hold at least 50% of total amounts due to clients upon demand either in inventory or in loans that can be called within seven calendar days.
- We aim to hold at least 90% of total amounts due to clients upon demand either in inventory or in loans that can be called back within one year.
As of June 30, 2022, the fair value of the digital assets (including stablecoins) transferred to us through BIAs, BPYs and other types of individually negotiated borrowing arrangements, totaled approximately $2.6 billion. As of June 30, 2022, the fair value of digital asset and US dollar collateral in connection with loans we made to clients and that is, subject to contractual arrangements and operation of law, able to be transferred, sold or otherwise rehypothecated by us, totaled approximately $1.3 billion. Of the total of approximately $3.9 billion, approximately:
- 46% was lent by us to institutional and retail borrowers;
- 35% was readily accessible and held with third-party custodians and multi-party-computation wallets and accounts (which may include assets deployed for hedging activities);
- 10% was posted as collateral in connection with our individually negotiated borrowings;
- 5% was held with banks and brokers in the form of cash or securities; and
- 4% was deployed as investments or for non-custodial staking, as well as mining equipment and other assets.
We manage digital asset conversion risk by seeking to match liabilities with corresponding digital assets held on hand or deploying digital assets into loans or investments that will generally generate returns in the same denomination of the corresponding liabilities.
As of June 30, 2022, the fair value of our outstanding loans to borrowers was approximately $1.8 billion. We require many, but not all, borrowers to post varying levels of collateral depending on the borrower’s credit profile and the size of the loan portfolio. As of June 30, 2022, our net exposure was approximately $0.6 billion. We define net exposure as the sum of our net exposures to individual loan counterparties. Our net exposure to each individual loan counterparty equals the fair value of loans to the counterparty minus the fair value of collateral provided by the counterparty (excluding any amount of the counterparty’s collateral that is in excess of the counterparty’s loans). The average term of all loans within our loan portfolio is less than one year.
Institutional Loan Portfolio
We enable institutional clients such as hedge funds, market makers, proprietary trading firms, over-the-counter trading desks, and corporations such as exchanges and digital assets miners to obtain financing from us in the form of digital assets or U.S. dollar fiat currency. Interest on these loans is typically fixed and payable in kind. The average term of all loans within our loan portfolio is less than one year.
As of June 30, 2022, the fair value of our outstanding loans to institutional borrowers was approximately $1.5 billion. Each institutional client that borrows from us undergoes a credit due diligence process to allow our credit risk underwriting team to establish appropriate credit limits. We have established an internal credit lending policy that generally limits exposure to any one borrower, principal or guarantor based on net exposures, which represents our aggregate exposure to economically related borrowers for approval purposes. Based on our internal credit process, our loan approvals follow a transaction authority and credit limit matrix, which are based on a counterparty’s financial information and size, business model related to traditional or digital assets markets, country of domicile, leverage, and other credit measures.
We require many, but not all, institutional borrowers to post collateral in the form of digital assets, cash or other assets. Whether we require institutional borrowers to post collateral and, if so, the type and level of collateral we require, depends on the borrower’s credit profile and the size and composition of the loan portfolio. The collateral provided by our institutional borrower clients may also be subject to margin calls if the loan to collateral value ratio breaches certain thresholds set forth in their loan agreements.
Retail Loan Portfolio
We provide retail clients access to U.S.-dollar and stablecoin loans secured by digital asset collateral. We determine the interest rates for these loans based on the level of overcollateralization and the type of digital asset collateral. Interest on these loans is generally payable on a monthly basis, with the principal due at maturity. Loans we provide to our retail clients typically mature in one year, subject to our clients’ option to prepay without penalty.
As of June 30, 2022, the fair value of our outstanding loans to retail borrowers was approximately $0.3 billion. We typically allow retail clients to borrow funds with a value of up to 50% of their collateral. Given the volatility in digital asset markets, the collateral provided by our clients is subject to margin calls. If the value of a digital asset decreases significantly, such that the loan to value ratio is above a specified threshold, we will make a margin call to the client. If the client does not meet the margin call, we may liquidate a portion of the collateral and reduce the amount of the outstanding loan. If the loan to value ratio increases to an accelerated threshold at any time, we are authorized, without providing client notice, to liquidate the collateral to reduce the amount of the outstanding loan. Conversely, if collateral values increase, we may allow borrowers, upon request, to remove excess collateral. If a client defaults on repayment, we may liquidate an amount of collateral held for the client up to the value of the loan plus all additional amounts owed by that client.