In a newly unsealed report, BlockFi Inc. executives are accused by creditors of disregarding repeated warnings from the risk management team regarding substantial loans issued to Sam Bankman-Fried’s Alameda Research. These loans were collateralized with digital tokens created by FTX. The report, prepared by a committee representing BlockFi’s unsecured creditors, blames the Chief Executive Officer, Zac Prince and other senior managers for the crypto lender’s failure.
According to the committee’s findings, BlockFi possessed a copy of an Alameda balance sheet as early as August 2021, indicating that the firm relied substantially on FTT, a digital token issued by FTX. Alameda’s reliance on FTT aroused worries within BlockFi, but these concerns were allegedly rejected by Prince. The report cites Prince’s email, in which he refers to Alameda as “the largest/clearest growth opportunity we have.”
After January 2022, the risk management team stopped sending memos to Prince about the potential hazards of lending to Alameda, instead shifting discussions to “offline meetings and Slack,” where the CEO acknowledged the vulnerability on occasion. When BlockFi declared bankruptcy, it owned approximately $1.2 billion in assets linked to FTX and Alameda.
The committee’s report also accuses BlockFi of having a purely faulty business model that relies on riskier investment partners to generate high consumer returns. This method hindered BlockFi’s ability to conduct business with a broader range of companies, leaving them reliant on a smaller number of high-yield suppliers such as Alameda, Three Arrows Capital Ltd., and Grayscale Investments’ Bitcoin trust.
The committee’s report highlights concerns expressed by some BlockFi executives about FTX. A year before the platform’s demise, BlockFi’s COO Flori Marquez expressed scepticism about using FTT as collateral, calling it “sketchy” and inquired about associated risks. Prince responded by expressing concerns that if FTX went down, FTT would follow suit.
BlockFi argues that the Slack exchange was mischaracterized by the committee, claiming that Prince was discussing the risks and benefits of taking the tokens as collateral and staking them on FTX’s platform.
BlockFi filed for Chapter 11 protection in November 2022 and intends to liquidate in bankruptcy to repay customers to the best of its ability.