As blockchain technology and its associated economy continue to mature, a growing number of projects are aiming to provide services that have been the mainstay of more established, and traditional entities.
Nowhere is this more evident than in the decentralized finance (DeFi) sector, and BlockFi is a wealth management platform that enables users to earn interest on their digital assets as well as borrow funds by using their cryptocurrency holdings as collateral.
The project aims to disrupt the financial industry by allowing people to put their digital assets to use, and by offering attractive terms for anyone intending to make use of their platform.
BlockFi is based in New York, USA and retains a business address at 201 Montgomery Street, Second Floor, Suite 263, Jersey City, New Jersey 07302.
The company was launched in August 2017 by Zac Prince and Flori Marquez, and the pair have successfully raised over $60m in funding over four investment rounds, with the last round taking place in December 2018.
BlockFi has secured investment from well regarded entities including ConsenSys Ventures, Kenetic Capital, SoFi, Mike Novogratz’s Galaxy Digital, and Anthony Pompliano’s Morgan Creek Capital.
BlockFi is classified as a secured non-bank lender and offers US Dollar loans that are backed by crypto assets and operates under Article 9 of the Uniform Commercial Code which governs secured lending.
The company also files UCC-1 financing statements with each of its borrowers’ states. BlockFi holds its clients’ crypto assets with Gemini which is a licensed cryptocurrency exchange and registered custodian, and issues loans into their bank accounts in the form of USD payments. The team have also connected with third party loan servicer Scratch which manages all loan contracts and repayments.
The platform is currently operating in around 35 US states, and collateral options include Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC) and Gemini’s GUSD, with plans to integrate additional crypto assets in the near future.
Why Use BlockFi?
The company runs in compliance with the USA’s federal laws, and the core team are experienced professionals with significant experience in digital finance and lending. The company’s main selling point is that it allows individuals to put their crypto holdings to use and deposit them into interest accounts or use them as collateral for loans.
The team also offer flexible repayment plans with quite reasonable interest rates, and aim to come to the rescue of individuals who need cash in the short to medium term, and prefer to keep a hold of their digital assets in order to benefit from any future high prices.
At the same time, anyone who purchased cryptocurrencies such as Bitcoin and Ethereum at rates much lower than today’s current prices, would be subject to significant capital gains taxes if they were to sell their holdings.
BlockFi alleviates these issues by offering crypto backed US Dollar loans that provide crypto holders with immediate access to fiat without forsaking the benefits of owning cryptocurrencies during a potential price surge. At the same time, anyone depositing crypto assets with BlockFi can also benefit from compound interest being applied to their holdings which provides them with a new way to passively increase their portfolio value.
Which Services Does BlockFi Provide?
BlockFi essentially offers two main products namely their Interest and Loan Accounts.
The BlockFi Interest Account
The BlockFi Interest Account (BIA) allows you earn compound interest on your Bitcoin (BTC) and Ethereum (ETH) deposits. In order to receive interest payments paid out every month in either Bitcoin or Ethereum, it’s just necessary to store the cryptocurrencies with BlockFi. Currently, anyone using the platform can expect an annual yield of approximately 6%.
The BlockFi Crypto Backed Loan Account
Users of the platform are able to deposit their Bitcoin (BTC), Ethereum (ETH), or Litecoin (LTC) in order to receive a loan in US Dollars. It’s possible to loan an amount worth up to 50% of the assets deposited and the rate of interest starts at around 4.5% with a 12 month standard loan duration, although BlockFi also includes options to prepay or refinance at the end of the loan term.
How Does BlockFi Work?
Users can either deposit cryptocurrencies into an interest account, or use them as collateral for a USD loan. The interest account pays a variable interest rate of around 6% annually, (which compounds monthly) with returns paid out in Bitcoin or Ethereum. With regards to the loan account, it’s important to note that as BlockFi provides secured loans backed by users’ cryptocurrency holdings; they can legally keep the funds held as collateral if an individual defaults, or stops paying back the loan.
This works in a similar way to a bank giving a client a mortgage and using the property as collateral, in the event that the borrower stops paying off the loan, the bank can repossess the property. With BlockFi, once an individual has been approved for a loan, their assets are transferred to a wallet controlled by Gemini, and remain there until the loan is paid off.
After BlockFi receives the collateral, the client’s account is credited with US Dollars, and they are required to pay interest on the loan on a monthly basis before using their final repayment to pay back the loan amount in full using either fiat or Bitcoin and Ethereum.
In the event of any issues, BlockFi can take possession of the equivalent amount of cryptocurrency needed to pay off the rest of the loan, and borrowers are expected to make a crypto deposit worth a minimum of twice the value of the loan as collateral.
The application process can be completed in a few minutes, and users can specify their desired loan terms and submit their application with a response generally being given a few hours after it is received. BlockFi have certain requirements regarding who is eligible for a loan, and to get approved, it’s necessary to pass their loan qualification criteria.
Who Can Take Out a Loan on BlockFi?
When applying for a loan, you just need to sign up on the website, input your requested loan amount, select the crypto you want to deposit, and enter your KYC/AML information for identity verification purposes. However, BlockFi does not perform any hard or soft credit checks, meaning that using the platform does not affect your credit score. BlockFi is able to operate without having to credit check its clients as crypto assets are sent over to Gemini and held as collateral before loan proceeds are issued therefore mitigating any risk.
The Loan Eligibility Criteria
Before taking out a loan, you will still need to provide your personal details, social security information, and financial history. In order to be approved you’ll have to meet certain requirements and these include:
- A minimum of $15,000 in crypto assets
- No liens on assets (including tax liens)
- No bankruptcies
In addition, the BlockFi Interest Account is generally available to anyone over the age of eighteen. However, the BIA is not available to the inhabitants of nations sanctioned by the US or on any watch lists. Furthermore, the Interest Account is not available to anyone in the European Union or the states of New York, Connecticut, and Washington.
How the Loan Process Works
The BlockFi team have outlined the following 9 step process:
- Create an account at https://app.blockfi.com/signup
- Click on the Loan tab
- Click Apply and fill out the application.
- You will receive a decision less than 24 hours
- Review your loan offer and sign the loan agreement
- Transfer collateral to BlockFi’s secure storage wallet
- You then receive your loan the same day in USD via a wire to your bank account or stablecoin to your wallet address of choice.
- Make interest only payments monthly using USD, BTC, ETH or LTC
- Pay off the principal in one payment at the end of the term or refinance at current rates
BlockFi’s Terms and Conditions
BlockFi provides an Individual Account, which is owned by one person or entity who can deposit, transfer or withdraw the cryptocurrency held in the account. They also offer a Business Account which is owned by a corporation, or other commercial entity holding an account in any capacity other than an individual capacity.
BIA compound interest
BlockFi Interest Account clients can deposit their Bitcoin or Ethereum and earn up to 6% interest annually. This is paid out on at the beginning of every month, and the interest earned by account holders compounds, increasing the annual yield to 6.2%. Here, with a 6% compound interest rate, a client who deposits 1 Bitcoin, on February 28 will have a balance of 1.005 BTC at the end of March. This process repeats month over month and leaves the client with 1.062 BTC 2 months later and continues until the client decides to withdraw their funds.
BlockFi revealed in a recent news release that they will be making the following rate adjustments to BIA accounts as of June 1, 2019:
- BTC balances above 25 BTC will earn 2.15% interest (previously 2% interest rate). All balances between 0.5 BTC and 25 BTC will continue to earn 6.2% APY
- The rate for deposits of between 25 ETH and 100 ETH will decrease from 6.2% to 3.25% APY
- Balances above 100 ETH will earn 0.2% APY
The minimums and maximums for the BIA
There are no minimum or maximum deposits for the BlockFi Interest Account. Despite this, only deposits over 0.5 BTC or 25 ETH actually accrue interest. Balances of up to and including 25 BTC or 250 ETH (equivalent to around $130,000 and $40,000 respectively) will earn the 6.2% APY interest rate. Any balances over this limit earn a tiered rate of 2% interest. This means that having 25.5 BTC in a BIA account, sees the first 25 BTC earning interest at 6.2%, while the remaining 0.5 BTC earns interest at 2%.
Crypto loan stipulations
BlockFi loans start at a 4.5% interest rate with an additional origination fee of around 1% to 2% and generally have a duration of 12 months. In addition, the loan-to-value (LTV) ratio determines the amount of crypto collateral needed to be deposited before taking out a loan, and BlockFi offers LTVs up to 50% with BTC, ETH, or LTC accepted as collateral.
BlockFi loans are interest-only and clients are expected to only pay interest during their monthly payments, with a lump sum payment for the remaining amount being required at the end.
Is BlockFi Safe?
Assets deposited with BlockFi are securely stored at unique wallet address generated by Gemini. The exchange is licensed by the New York State Department of Financial Services, and is a fiduciary under New York Banking Law and adheres to strict capital reserve requirements and banking compliance standards. Gemini also has digital asset insurance coverage and is SOC 2 Type 1 security compliant across both its exchange and custodian platform.
Gemini is also known as being one of the most secure exchanges in the sector and employs security protocols that include cold storage, two-factor authentication (2FA), and Amazon Web Services hosting. Any assets sent over as collateral for a loan, are transferred into Gemini’s cold storage system, and this offline storage helps to protect users’ funds from cyber attacks. BlockFi also makes use of 2FA and users are prompted to input a password and verification code generated by an authenticator app, upon logging in.
BlockFi also reserves the right to generate interest on assets held in Interest Accounts by lending them to institutional and corporate borrowers. However, in order to ensure loan performance, BlockFi lends crypto on over-collateralized terms (similar to the structure of our crypto-backed loans), and employs an automated risk management system which monitors positions 24/7, and provides the same risk management system used with BlockFi’s crypto-backed loans.
Is BlockFi Suitable for Beginners?
Due to the eligibility requirements attached to taking out a crypto backed loan, the platform appears to be suited to more savvy individuals with some experience of business and investing. However, there are no minimum deposits for the BlockFi Interest Account which may be attractive to beginners, although only deposits over 0.5 BTC or 25 ETH actually accrue interest. Again this may prove to be too steep a minimum for a beginner, unless they have recently purchased cryptocurrencies specifically for this purpose.
Despite this, BlockFi attempts to cater to newer entrants to the market by providing a host of resources on their website and these include a Resource Center, Blog, FAQ page, and Loan Calculator. BlockFi’s signup process is pretty straightforward, and anyone opening an interest account can soon earn compound interest passively, however, the loan accounts are more complicated to understand with regards to mitigating risks.
In the event that your crypto portfolio drops in value, you may be required to deposit additional funds and post more collateral. For example, anyone taking out a loan against $100,000 worth of Bitcoin is eligible for a loan amount of $50,000 due to BlockFi’s loan-to-value ratio of 50%.
If the price of Bitcoin falls by 30% and the collateral drops to $70,000 in value, the loan proceeds of $50,000 are equal to 70% of the value of the collateral as 50,000 divided by $70,000 comes close to 70%. This threshold causes a trigger event to take place, and upon notification by BlockFi, you have 72 hours to contribute more collateral in order to further support your loan.
However, the team prefer to provide a cushion of a 50% drop in value before a trigger event is issued meaning that the LTV rate may be adjusted in order to facilitate this.
All in all, BlockFi is more suited to individuals with some experience of business or investing, or institutions aiming to earn compound interest on their crypto holdings. However, the volatile nature of the cryptocurrency market means that anyone who has been involved in the space for close to a year should have a good understanding of the potential for significant price movements.
Some Points to Consider
Despite handling cryptocurrencies, BlockFi operates a quite centralized service, and states in its terms of service that the interest rate on BIAs isn’t fixed, and can be changed every month.
They also state that will effectively take ownership of your funds and will “pledge, repledge, hypothecate, rehypothecate, sell, lend, or otherwise transfer or use any amount of such cryptocurrency separately or together with other property, with all attendant rights of ownership”.
This essentially gives BlockFi the right to handle your funds in any way they deem appropriate and on top of this, there’s no guarantee you will receive any new assets generated from a hard fork, and interest accounts are also not covered by insurance against losses.
Furthermore, the company’s business model requires BlockFi to operate on fractional reserves for their cryptocurrency holdings much like a traditional bank. As they choose to sometimes sell and lend cryptos in order to generate additional fiat, the volatility of cryptocurrency prices can lead to adverse results as borrowers on their platform only repay the USD value of their loan.
However, the company may have more leeway to operate given that most loans last for 12 month periods, and they can expect the minority of their users to demand sudden access to their crypto deposits.
- Earn interest on Bitcoin and Ether deposits
- Fast liquidity without cashing out of cryptos
- Loan approval without traditional credit checks
- Loan eligible for US tax benefits
- Large loans available
- Centralized service
- Interest rate not fixed
- Fractional reserve business model
BlockFi provides a useful service for anyone sitting on considerable stacks of cryptocurrencies and institutions or early adopters who have been able to amass significant crypto holdings are well positioned to benefit from the service.
Anyone interested in taking out a crypto backed loan is required to have at least $15,000 in Bitcoin or Ethereum which is out of the reach of most crypto investors. In addition, you must deposit at least 0.5 BTC or 25 ETH to accrue interest in a BlockFi Interest Account.
Despite this, BlockFi provides eligible individuals and corporations with an alternative way to raise capital and allows them to generate funds without having to liquidate their crypto holdings. The company is transparent, and regulatory compliant, and also provides financial products will reasonable fees and interest rates.
However, the amount of control they hold over their clients’ assets, and their preference for selling and/or trading assets for profit make this a service best suited to individuals with a high aptitude for calculating risk.
It’s also a good option for crypto holders in the US that live in states that charge capital gains tax as BlockFi allows people to generate funds without cashing out their holdings and becoming liable for capital gains taxes.
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