Sam Bankman-Fried’s crypto trading platform FTX has bailed out struggling crypto lender BlockFi with a $250 million loan during a trading downturn in the crypto market that is pushing some of the biggest participants into the red.
Crypto lenders, which provide high yields for investors, came under renewed scrutiny this month after Celsius Network froze customer withdrawals on June 12. The next day, BlockFi announced it would lay off 20 percent of staff to cut costs. The company had struggled to close a new round of venture funding and anticipated lowering its valuation to get investors, The Block reported.
BlockFi was one of the companies that liquidated the collateral on a loan from Singapore-based crypto hedge fund Three Arrows Capital, Financial Times reported. The company borrowed Bitcoin from BlockFi but couldn’t meet a margin call on the loan, according to the report.
This is Bankman-Fried’s second rescue of a struggling digital assets company in June. Last week, he helped crypto broker Voyager Digital with a loan totaling $485million in cash and Bitcoin.
The rescue operation garnered his company the new nickname of “Crypto Federal Reserve” for pulling off a maneuver more commonly associated with a central bank than a market participant of so-called decentralized finance
“One of the critical principles of cryptocurrencies is their independence from authorities such as central banks,” Scott Chipolina and Joshua Oliver wrote for Financial Times. “But billionaire Bankman-Fried is building a pivotal role akin to the authorities that rescued banks in the 2008 financial crisis, analysts said.”
It’s a myth that blockchains are decentralized, Coingeek reported. Mostly, they have “all-too-real vulnerabilities”, according to a new report, “Are Blockchains Decentralized?” prepared by tech security firm Trail of Bits (ToB) for DARPA — the Defense Advanced Research Projects Agency aka the research and development arm of the U.S. military.
The $250 million in revolving credit from FTX is expected to keep BlockFi solvent, The Block reported.
Bankman-Fried used the word “injecting” instead of “bailing out” to describe the infusion into BlockFi, tweeting on June 21 that FTX was partnering with the crypto lender so it could “navigate the market from a position of strength.” The lender “is financially strong; all operations are normal, as they always have been, and assets are safe,” SBF added.
FTX raised $400 million in January at a $32 billion valuation. With a Forbes net worth of $24 billion, Bankman-Fried said he wants FTX to become the “biggest source of financial transactions in the world.”
The loan set off a discussion on Twitter about whether or not the injection qualifies as a bailout.
“Private companies doing a private deal is the exact opposite of a bailout” tweeted lawyer Jake Chervinsky, head of policy at The Blockchain Association. “This is how capitalism is supposed to work in times of market stress. No government intervention necessary”.
ManiacShogun suggested FTX is doing exactly what the Feds did during the Great Recession. “Does this not mimic what happened in 2008? Just replace FTX with the Fed. And all these failing protocols are the non banks and banks of wall street. Why is SBF attempting to save broken DAOs and DeFi that were mismanaged and made hugely irresponsible investments?”
Photo: Sam Bankman-Fried, founder and CEO of FTX, testifies at a Congressional hearing on digital assets and the future of finance, Dec. 8, 2021. (Photo By Tom Williams/CQ-Roll Call, Inc via Getty Images)