The fin tech start up BlockFi pays customers interests in Crypto on their crypto assests, but is this just an easy chance to receive high returns or are the risks probably too high?
BlockFi Inc.
BlockFi Inc. was founded in August 2017, is located in the USA in New Jersey and is a Delaware Company, which is a legally registered company in the state of Delaware but can conduct business anywhere.
BlockFi is financed as a Venture Capital start-up (Investors such as Fidelity, Winklevoss Capital und Morgen Creek)
- In two seed rounds in February 2018 and June, BlockFi raised $ 3.9 million
- Further investments and a huge $ 50 million capital injection in the form of convertible bonds to ensure the supply of liquidity.
- In August 2019 and February 2020, they raised another $ 18.3 million as Series A and
- $ 30 million as Series B from Peter Thiel’s Fund Valar Venture
They are offering three products:
- interest accounts
- Crypto loans and
- trading
Founder and CEO Zarachy Lee Prince is in charge at BlockFi.
Interest accounts
BlockFi is currently paying interest on six different Cryptocurrencies:
- Bitcoin
- Ether
- Litecoin
- USDC
- GUSD
- PAX
The paid interest rates are depending on the type and the amount of the deposited crypto and ranges between 2%-8.6% p.a.. Interests are paid on the first of every month while the customer can chose on which type of crypto the interest is paid.
For example: A customer holds $10,000 in BTC and gets 5% p.a. and receives $41,67 interest per month. He could decide if he either wants to recieve that interest in ETH (0.17 ETH (09:48 07-13-2020 UTC+1)) or in any other supported crypto currencies.
You need to know that BlockFi adapts the interests due to crypto market fluctuations therefore it could happen that the interests are changing dramatically from month to month.
Current interest rates
So it?s looking pretty attractive to owners of crypto assets but:
- How save are the deposits at BlockFi?
- How does BlockFi paying the interest rates?
- Is the business regulated and licensed?
Before we answering this question i will guide you through
Crypto loans
BlockFi offers customers to exchange their crypto assets in USD cash, without selling their crypto.
For example:
- A customer owns 6 BTC, approx. $60,000 and he needs $30,000 urgently. The customer thinks that Bitcoins value will increase (to the moon :)) and is unlikely to sell it. BlockFir offers him the following solution.
- The customer send the 6 BTC to BlockFi
- applies for a loan $30,000 and accept the offer from BlockFi
- As an insurance, 6 BTC are transferred internally by BlockFi, which covers the value of the borrowed $30,000 twice. (50% Loan-To-Value, LTV)
- The crypto is locked now
- The loan is deposit to the customer?s bank account.
- The customer is paying an interest rate of 9.6% p.a. on the borrowed $30,000.
- After payback of the credit , the locked crypto are transferred back to the customer?s BlockFi Account.
To apply for a loan it just takes 24 h. BlockFi doesn?t check the borrower?s credibility, because the credit is covered by the deposited crypto.
--> A USD credit is attractive for the owner of crypto assets in the case of an urgent need for liquidity.
A potential problem with these type of credits are the bitcoin price fluctuations.. In the case the bitcoin price falls during the loan term, the customer would be asked to deposit more BTC as security. If the customer can?t deposit more BTC and the value remain decreasing BlockFi will sell the customers BTCs hold in the security position to cover the loan. A disaster for every HODler.
Trading
On BlockFi you can exchange BTC, ETH, LTC, GUSD and CUSD directly. Each currency is tradable in every combination of currency pairs. For each trade a customer pays a fee of 0.5%. Trading sales are limited to maximum of $50,000 oer day.
This feature is good for every interest hungry customer. It allows the customer to exchange his currencies into highest interest paid currency, but he also takes all the currency risk.
--> Trading currencies is uncomplicated on BlockFi
How save are the deposits at BlockFi?
BlockFi stores your crypto deposits with the custodian Gemini thats why every BlockFi customer receives a Bitcoin address from Gemini and not from BlockFi. Gemini keeps 95% its deposits extremely securely offline in cold storage (secure HSMs (Hardware Security Modules according to FIPS 140-2 Level 3 or higher) the other 5% are hold in hot wallets (secured by the insurer Aon). Plus Gemini tries to be compliant to traditional banking guidelines.
On the other hand, their offers are the only crypto service to have passed the SOC 2 Type 1 control scheme (voluntarily). Passing this exam by Deloitte confirms that Gemini's processes actually follow strict rules and procedures. Gemini wants to repeat the test annually.
In the case of an insolvence of the commpany, BlockFi assures that pay back of customer?s deposits will be in the first place. This could only happen if borrowers from BlockFi are insolvent. In the unlikely case of a crisis like 2008 occures, the customer has to accept with the loss.
How does BlockFi paying the interest rates?
BlockFi’s business model is very simple: BlockFi borrows cheap crypto deposits and lends them at a higher interest rate.
How is BlockFi verifying its user?
BlockFi verifies its user by Onfidio. Onfidio wants pictures of the ID Card and selfies from new customers. Companies has to verify themselves as well and undergoing a verification process.
What about taxes?
Each customer has to care for himself.
How BlockFi distinguish between other crypto lenders?
Well if we look to nexo, Nexo has tokens but they are only optional you still receive interest on a broad range of cryptocurrencies.
FAQ
Hidden fees?
Yes BlockFi is quiet expensive. A withdraw from your BTC deposit cost you 2.5 mBTC, but the first withdraw in the month is for free.
How long does a transaction take?
Only between Monday and Friday. A transaction normally takes 24 h. If higher amounts are request, delays can be expected or the owner has to undergo an additonal verification process.
How fast is the support?
Not longer than 24 h, even complex issues.
Further FAQ
Conclusion
BlockFi is an innovative company with attractive products, strong financial coverage and good marketing. The safekeeping of customer deposits achieves the highest possible security in the crypto market.
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