FTX Bails Out BlockFi as Pressure on Crypto Lenders Continues

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By Geoffrey Smith 

Investing.com -- FTX is on a roll.

The cash-rich crypto exchange owned by Sam Bankman-Fried figured prominently in another couple of deals on Tuesday, driving consolidation in a crypto space that has been battered by the sudden drop in digital asset values.

FTX is extending a $250 million lifeline to crypto lending platform BlockFi, only a week after its CEO Zac Prince was forced to deny rumors that it had been driven to the verge of insolvency by the blow-up of Hong Kong-based hedge fund 3 Arrows Capital.

Prince had denied the rumors but had acknowledged that it had been forced to liquidate the position of an unnamed large client after it failed to meet a margin call. BlockFi had continued to operate normally, nonetheless, in contrast to a number of other exposed lenders who were forced to either suspend or limit withdrawals.

Prince said on Tuesday that his exchange had signed an agreement for a $250 million revolving credit facility with FTX. The facility is designed to be legally subordinate to client funds, meaning that if BlockFi ever does run into trouble, customers should get their money back before FTX does.

Separately, The Block reported that FTX has agreed to buy equities broker-dealer Embed Financial, in a deal that will help it expand beyond its core crypto activities; FTX is expected to start offering stock trading in the U.S. later this summer. The terms of the deal weren’t disclosed.

If confirmed, the deal would be the second for FTX in less than a week. It agreed to buy Canada-based digital asset platform Bitvo for an undisclosed sum last Friday.

FTX is in a better position than most to ride out the volatility that has hit many crypto platforms hard in recent weeks, having raised $400 million in fresh equity in January at a valuation of around $32 billion.

By contrast, the last weeks have been hard on platforms with weaker balance sheets. Celsius Network said on Monday that it still needed more time before lifting its freeze on customer withdrawals, while Hoo Exchange, Finblox, AEX Global and Babel Finance have all imposed restrictions of varying severity on their customer deposits.

At least five U.S. states are reported to be investigating the incidents leading up to the Celsius freeze.

Babel, which suspended withdrawals on Friday and which is now struggling with fake accounts on Twitter trying to impersonate it, said on Monday that it had reached “preliminary agreements” with stakeholders including customers to reschedule some of its debts, easing the company's short-term liquidity pressure.

Withdrawals from Babel remain impossible for the time being, however.

The volatility in crypto assets has largely been a function of central banks around the world - notably the U.S. Federal Reserve - tightening their monetary policy to bring down inflation. That brought the price of Bitcoin down to as little at $17,800 at the weekend, before it recovered to stand at $21,542 as of 10:30 AM ET (14:30 GMT) on Tuesday. It's still down by over two-thirds from last year's peak. Other alternative coins have lost even more, exposing inadequate risk management at a number of major players.