by Jake Wengroff
BlockFi is essentially a modern-day crypto bank — without deposit insurance.
It offers a cryptocurrency exchange, interest-bearing accounts and low-interest-rate loans worldwide. With a BlockFi interest account, customers can earn between 3% and 8.6% compounding interest on their cryptocurrency holdings. The account has no hidden fees and no minimum balance requirement.
The interest rate varies by currency type and fluctuates with market values. Interest accrues daily and is added to customer accounts (earned) monthly.
How BlockFi Works: Borrowing Against a Portfolio
BlockFi lets customers borrow funds in US dollars against their crypto assets with interest rates as low as 4.5%. These loans are personal loans without limits on usage — they can be used to pay down debt, make a major purchase or make a down payment on a home.
Borrowers have to use crypto assets to back the loan with a loan-to-value ratio of at least 50% — meaning that the collateral is worth at least half of what is owed. Investors can borrow in US dollars, Gemini dollars or USD Coin and use Bitcoin, Ethereum or Litecoin as collateral. (That only a handful of digital currencies are used limits the downside risk, as these are considered the most stable.)
Borrowers pay a 2% origination fee to receive their loan, and pay interest between 4.5% and 9.75%, depending on the loan-to-value ratio.
In this way, you can avoid selling your crypto when you need cash, advises the Motley Fool. The Motley Fool also says that borrowing instead of selling “means you don’t have to report capital gains, which could save you money in taxes. Plus, the interest could be tax-deductible, reducing your tax bill even further.” (You can learn more about the tax implications of your crypto holdings here.)
However, borrowers risk losing their collateral — their crypto assets — if it drops in value. This means that the borrower would no longer have enough value in their interest account to support their loan balance, and BlockFi would sell those assets.
How BlockFi Handles Risk and Security
As a lender and a relative pioneer in the DeFi segment, BlockFi takes security very seriously. BlockFi is domiciled and regulated in the US, is institutionally backed and doesn’t have a utility token, or a coin used to fund operations. “That’s important — we play by the rules, to the benefit of our company and our clients,” notes the company on its website.
BlockFi has instituted a number of security measures and best practices in order to pay its clients crypto interest on a monthly basis and meet withdrawal requests on a timely basis, including the following:
- Keeping a material amount of digital assets available for withdrawal with third parties such as Gemini and Fidelity.
- Purchasing, as principal, SEC-regulated equities and predominately CFTC-regulated futures.
- Applying risk management to lending activities in the institutional market, with credit risks mitigated by credit due diligence or collateral (such as cash, crypto or other assets).
- Lending to multiple counterparties to minimize risk, using an automated margin-call system as a safety mechanism when distributing loans.
BlockFi and other providers of interest-bearing crypto accounts have been attracting scrutiny from several state regulators. According to Bloomberg, regulators from several states, including New Jersey, Alabama, and Kentucky, say such accounts, some of which hold billions of dollars in deposits, appear to be unregistered securities that aren’t disclosing their risks to investors. Indeed, BlockFi’s efforts to present security measures are needed to assure investors that it is doing what it can to protect investors.
BlockFi may be instituting its own set of controls to help its customers and counterparties, but it’s only one participant in the burgeoning DeFi space. It is also subject to the risk controls of the exchanges and wallets holding crypto assets that its customers use for transactions.
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Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, Jake covers such topics as security, mobility, e-commerce and IoT.
Fool.com – BlockFi Review
BlockFi – How BlockFi Handles Risk and Security