BlockFi’s Collapse Tied to Ignored Risks with FTX and Alameda Research

A preliminary report titled “Why Did BlockFi Fail?” submitted to the United States Bankruptcy Court for the District of New Jersey on July 14, 2023, has shed light on the reasons behind the failure of BlockFi, a prominent crypto lending firm. The report was filed by the Official Committee of Unsecured Creditors and involves several entities associated with BlockFi.

According to the report, BlockFi’s failure can be attributed to fundamentally flawed business models, unreasonable risk-taking, and ignored concerns from the management team. The document also provides a timeline of events leading up to BlockFi’s collapse and discusses the key individuals and entities involved in the case.

Zac Prince, the CEO of BlockFi, allegedly disregarded recommendations from the company’s risk management team over lending assets to Alameda Research. The risk management team had reported on the “high risks” associated with lending assets to Alameda, but Prince allegedly dismissed these concerns. By August 2021, BlockFi had lent Alameda $217 million, despite the risk management team’s warnings about potential risks if the FTX Token (FTT) used to secure the loans needed to be liquidated.

The report also reveals that BlockFi had roughly $1.2 billion in assets tied to FTX and Alameda Research when the firm filed for bankruptcy in November 2022. At the time of its Chapter 11 filing, BlockFi admitted it had “significant exposure” to FTX and its associated entities. FTX US had received a $400 million credit line from BlockFi in July 2022, furthering financial ties between the two firms amid a crypto winter.

The report suggests that while Alameda/FTX’s downfall may have triggered BlockFi’s downfall, BlockFi’s demise was rooted in business practices and decisions well preceding Alameda/FTX’s bankruptcy filing.

In response to the report, a BlockFi spokesperson said the firm disagreed with the report, alleging that the committee behind the report “cherry-picks statements out of context, errs on other matters, and does not deliver the objective analysis promised.”

The document also delves into the promises made to customers, the company’s corporate guidelines, the failures of oversight functions, and investment failures. The report’s findings highlight the importance of robust risk management and the potential consequences of ignoring such systems in the rapidly evolving crypto industry.

Image source: Shutterstock


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Caroline Ellison Of Alameda Avoids 110-Year Sentence With Plea Agreement.

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It is possible that one of the most important witnesses in the current FTX investigation may be able to avoid all seven counts of the charges that have been brought against her by entering into a plea bargain.

According to the terms of the deal, former Alameda Research Chief Executive Officer Caroline Ellison would only be prosecuted for criminal tax offences and would be eligible for immediate release on bond in the amount of $250,000.

The agreement reached between Ellison and the Office of the United States Attorney for the Southern District of New York to enter into a plea bargain was made public on December 21.

According to the paper, the former executive of Alameda will not be held accountable for any of the most serious allegations, for which she faced the possibility of receiving a jail term of up to 110 years.

Ellison was charged of committing crimes on seven different counts.Two people accused her of participating in and plotting to conduct wire fraud against clients of FTX. They also accused her of perpetrating the scam herself. The seventh count of the indictment against her said that she was involved in a conspiracy to launder money.

In return for Ellison’s cooperation, which consisted of providing the full disclosure of all the information and documents requested by prosecutors, the Attorney General’s Office agreed not to prosecute Ellison on any of those seven allegations of misconduct in office.

The arrangement does not provide Ellison with any protection against any other accusations that he may face from any other authority in the future.It also precludes the possibility of a criminal prosecution for breaches of tax law, even if such offenses were uncovered during the course of the judicial proceedings.

Ellison has consented to the bail restrictions, which include a $250,000 bond, a restriction that prevents him from leaving the United States, and the surrender of all travel papers. The federal prosecutors have agreed not to object to Ellison’s release under these circumstances.

Sam Bankman-Fried, the former CEO of FTX, is now in the custody of the FBI and is on his way back to the United States. Once he arrives, he will be sent immediately to the Southern District of New York to stand before a court.


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Alameda loaned SBF $1B: FTX bankruptcy filing

One of the four silo companies that had a significant role in the demise of the FTX bitcoin exchange provided Sam Bankman-Fried, the former CEO of FTX, with a personal loan in the sum of $1 billion.


According to a legal statement issued by John Ray III, the current CEO of FTX, which was included in active Chapter 11 bankruptcy filings, more money was taken by Bankman Fried.


In accordance with the statement, Alameda Research gave Bankman-Fried a direct loan of $1 billion while also lending $543 million to FTX’s director of engineering, Nishad Singh.


The man in charge of picking up the pieces after Enron’s catastrophic fall, Ray III, was harsh in his first petition with the United States Bankruptcy Court for the District of Delaware.


He even said that the circumstance was the worst he had ever seen in his professional career, pointing out the “total breakdown of corporate controls” and a dearth of reliable financial information:


According to the study, “This scenario is unparalleled, from compromised system integrity and inadequate regulatory oversight outside to the concentration of power in the hands of a relatively small number of inexperienced, uninformed, and maybe corrupted employees.”

Controls will be requested to be placed on accounting, auditing, cybersecurity, human resources, data protection, and other systems as part of the Chapter 11 petition. These regulations will be implemented across four groupings of businesses connected to the corporate structure of FTX.


There were four silos altogether. The FTX Group Ray III specifies four “silos,” each of which might be seen as a catch-all term for a distinct kind of FTX Group enterprise. The “WRS” silo is used to organise businesses that are owned by West Realm Shires Inc. FTX US, LedgerX, FTX US Derivatives, FTX US Capital Markets, and Embed Clearing are some of these companies.


Alameda Research is listed in the petition as a separate silo with separate businesses, although the “Ventures” silo is really made up of Clifton Bay Investments LLC and Ltd, Island Bay Ventures Inc., and Debtor FTX Ventures Ltd. The very last “Dotcom” silo is where FTX Trading Ltd. and other exchanges that use the moniker are situated.


Ray III’s suit claimed that Bankman-Fried owned all of the silos, with former FTX chief technology officer Zixiao “Gary” Wang and Singh owning negligible stakes in the business. Numerous financial institutions, endowments, sovereign wealth funds, and families whose lives were irrevocably changed by the demise of FTX were among the third-party equity investors in the WRS and Dotcom silos.


Bankman Enterprise Fried’s is also charged in the case with a variety of additional significant crimes. The FTX Group as a whole was found to have neglected to maintain accurate bank account listings, “keep centralised control” of its finances, and pay “insufficient attention to the creditworthiness of banking partners.” “


More information is revealed by Ray III, who claims that the WRS silo was the only branch to have undergone a valid audit by a reputable accounting company. He raises concerns about the Dotcom silo’s independently audited financial records, but he can’t find any independently examined financial accounts for the Alameda or Ventures silos.


According to the petition, there were also apparently severe flaws in the way the money was distributed.


For instance, FTX Set staff members used an online “chat” to seek payments “platform. Then, a variety of supervisors approved payments by responding with various emojis “Reads the section.

Ray III continues by alleging that there was a lack of documentation for activities like loans and that corporate monies were utilised to buy homes and personal items for consultants and workers. Ray III claims that despite the absence of proof, this did in fact take place.


The custody of digital assets is insecure right now.

The custody of bitcoin assets was also in disarray, with insufficient records or security precautions in place for FTX Group’s digital assets, according to the Chapter 11 filing.


The bitcoin assets that were held by the major businesses in the network were accessible to Bankman-Fried and Wang. In Ray III, the “improper activities” are described. “This entails accessing secret keys and extremely sensitive information for the worldwide network of organisations through an unprotected group email account.


Additionally, the business did not regularly reconcile its bitcoin holdings and used software to mask the misappropriation of customers’ money. This allowed certain components of the auto-liquidation strategy put in place by to be subtly omitted from Alameda.


Perhaps the most amazing part of the issue is that the debtors who have filed for bankruptcy have only gotten “a fraction of the digital assets” that they had anticipated to retrieve. Despite the fact that cold wallets holding a total of $740 million worth of cryptocurrency have been seized, it is yet uncertain whose silo the funds belong to.


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No Significant Risk Exposure to FTX or FTT, Says Coinbase CEO

Amid the meltdown of FTX, Coinbase CEO Brian Armstrong tweeted that Coinbase has no significant exposure to FTX and its platform currency FTT, as well as Alameda’s exposure.

Coinbase CEO Brian Armstrong said that the crash of the FTT token on the FTX exchange appears to be the result of high-risk business practices, including conflicts of interest between related entities and misuse of customer funds (lending user assets).

The Coinbase exchange said it would not engage in this type of high-risk activity. Without customer instructions, Coinbase said it never uses customer deposits for other businesses, and users can withdraw assets at any time.

As a publicly listed exchange in the United States, Coinbase’s financial audit is open to all investors and customers. Coinbase has never issued its platform token.

Armstrong emphasized that Coinbase should continue to work with regulators and policymakers around the world in the future to establish reasonable regulations for centralized exchanges or custodians in each market to build trustworthy and reliable products for the industry, but currently, there is not yet a level playing field.

Sam Bankman-Fried, founder and CEO of cryptocurrency exchange FTX, manages assets through Alameda Research, a quantitative cryptocurrency trading firm he founded in October 2017.

This summer, FTX CEO Sam Bankman-Fried has been buying up crypto companies that have been caught up in the credit crunch caused by the sudden collapse of cryptocurrencies Luna and UST or TerraUSD.

However, the leaked balance sheet of Alameda Research shows that the balance sheet of Alameda Research is mainly composed of FTT, a token issued by FTX. However, the liquidity of FTT is not ideal, which has raised investors’ concerns that Alameda may encounter a liquidity crisis.

This news is bound to lead to hyperinflation of the exchange’s native token, FTT. While FTX native token FTT has fallen 71.6%, CoinGecko showed, and the firm’s net crypto asset holdings have plunged 83% in just the past two days.

In the long run, the crypto industry is expected to build a better system using DeFi and self-custody wallets, not relying on third parties. Everything can be publicly audited on-chain.

Analysis suggests the weakness in cryptocurrency exchange FTX this time may provide short-term benefits to other exchanges such as Coinbase. Still, FTX’s liquidity risk has also raised concerns about the overall vulnerability of the industry. Retail investors may consider moving assets to private wallets if the centralized exchange problem persists.

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$500M blockchain gaming proposal Game7 to come online with backing from industry veterans

As outlined in a prepared statement obtained by Cointelegraph, Game7 is an upcoming $500 million blockchain ecosystem acceleration decentralized autonomous organization, or DAO, with the goal of onboarding gamers worldwide to the blockchain ecosystem. Entities backing the proposal include BitDAO, Forte, Alameda Research, Mirana Ventures, Warner Music Group, Aleo, Avalanche, Interchain Foundation, Offchain Labs, OP Games, Polygon Studios, and Solana Ventures. Meanwhile, Forte Labs and Magnus proposed its creation.

Together, Forte will commit $100 million in fiat and crypto while BitDAO will commit $400 million worth of crypto assets in its treasury, such as Ether (ETH) and Tether (USDT). The funds will be released over a period of five years. 

First, 15% of the funds will be allocated to grants promoting the research, development, tooling, and regulatory compliance of novel blockchain games. Next, 5% of funds will be used to educate developers on building token economies. Finally, 80% of the funds will be given directly to game studios and DAOs. In the distribution proposal, BitDAO will retain the majority of ownership rights regarding intellectual property, while most of the governance rights will be given to community partners.

Forte builds secure economic technology for blockchain games. As for BitDAO, it is one of the largest decentralized treasuries in the world, with billions of dollars in assets. Brian Lee, a partner at Alameda Research, a quantitative trading firm involved in the venture, had the following comment with regards to the development:

Gaming has become one of our main investment focuses this year and we are very excited to be part of and work with Forte, the go-to token-based gaming infrastructure, BitDAO and Mirana Ventures, to back incredible game developers and accelerate blockchain-based game adoption.