Zac Prince Disregarded Risk Management Team’s Recommendations
The CEO of bankrupt cryptocurrency lending firm BlockFi, Zac Prince, allegedly disregarded recommendations from the company’s risk management team regarding lending assets to Alameda Research. This information was revealed in a July 14 filing with the United States Bankruptcy Court for the District of New Jersey by the unsecured creditors’ committee.
Risk Management Team’s Concerns Ignored
According to the filing, BlockFi’s risk management team reported the “high risks” associated with lending assets to Alameda, but Zac Prince dismissed their concerns. By August 2021, BlockFi had lent Alameda $217 million despite the team’s warnings. The risk management team had raised concerns about the potential risks if the FTX Token (FTT) used to secure the loans needed to be liquidated.
“As early as August 2021, BlockFi’s risk management team was advised that Alameda’s balance sheet was largely comprised of ‘~7bb unlocked FTT, and 11bb total including locked tokens based on unaudited financials,'” stated the filing. “This set off alarms at BlockFi. Mr. Prince dismissed the concerns, urging the risk team to learn to ‘get comfortable [with Alameda] being a three arrows size borrower, just with FTT and other collateral types instead of GBTC shares.'”
Lack of Communication and Exposure
After January 2022, the risk management team ceased issuing memos to Zac Prince about the potential risks associated with lending to Alameda. Discussions were moved to offline meetings and Slack, where the CEO occasionally acknowledged the exposure. At the time of BlockFi’s bankruptcy declaration, the firm had approximately $1.2 billion in assets tied to FTX and Alameda.
BlockFi’s Chapter 11 filing in November 2022 revealed the firm’s significant exposure to FTX and its associated entities. In July 2022, FTX US received a $400 million credit line from BlockFi, further deepening the financial ties between the two companies during a crypto winter.
Continued Risk and Relending to Alameda
The filing noted that BlockFi recalled its loans from Alameda in June 2022, and Alameda repaid its outstanding balance to almost zero. However, instead of severing ties, BlockFi re-lent Alameda nearly $900 million between July and September 2022, with the loans being primarily collateralized by FTT.
The filing added, “It may be true that Alameda/FTX’s downfall triggered BlockFi’s downfall, but BlockFi’s demise was rooted in business practices and decisions well preceding Alameda/FTX’s bankruptcy filing.”
BlockFi Responds
In response to the report, a BlockFi spokesperson stated that the firm disagreed with its findings. In a separate court filing, BlockFi alleged that the committee behind the report cherry-picked statements out of context, made errors on other matters, and failed to deliver the promised objective analysis.
BlockFi directly cited exposure to FTX as one of the reasons for its bankruptcy filing. The practice of collateralized loans based on FTT tokens by FTX left many firms in a difficult position after the token’s price dropped from over $25 to under $2 amid the Chapter 11 filing and reported liquidity issues.
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