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FTX Bails Out Another Crypto Lending Platform

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Crypto exchange FTX has come to the rescue of BlockFi, providing it with a US$250 million revolving credit facility, as liquidity concerns continue to swirl around the industry’s leading borrowing and lending platforms.

BlockFi CEO Zac Prince said that that the credit facility will provide the platform with “access to capital that further bolsters our balance sheet and platform strength.”

Last week, a Financial Times report revealed that Singapore-based crypto hedge fund Three Arrows Capital (3AC) was liquidated by BlockFi and after it failed to top up its loan collateral.

“Sometimes leadership means acting decisively and that’s what BlockFi did: removing troublesome counterparties before they become a problem, and adding cash before it was necessary,” said FTX CEO Sam Bankman-Fried.

Read more: Reprieve for Babel; Celsisus Goes Offline

Rival lending platforms Celsius and Babel Finance have froze withdrawals over the past weeks, citing liquidity concerns. However, Bankman-Fried reaffirmed that BlockFi remains “financially strong” with all operations normal “as they have always been”, despite unconfirmed reports of the platform losing US$285 million over the past two years.

“We take our duty seriously to protect the digital asset ecosystem and its customers”, Bankman-Fried added.

BlockFi is among the raft of crypto firms that have announced job cuts in recent weeks, with the platform saying that it will cut about 170 staff, or about 20% of its workforce.

This is FTX’s second bailout of a digital assets company in as many weeks, with the company becoming something like an emergency lender for the industry. Last week, crypto broker Voyager Digital (VOYG) also secured a revolving line of credit with the Bankman-Fried founded quant trading shop Alameda Research.

Are CeFi lending platforms sustainable?

The sustainability of centralised crypto lending platforms have been called into question in recent weeks. These providers primarily lend to crypto exchanges, hedge funds, and/or institutional investors through their online platforms and over-the-counter (OTC) transactions, which inevitably creates a counterparty risk.

If these counterparties fail to return the funds (e.g. in the event of a market crash), the lending platform may become insolvent, which is what has been happening to providers such as Celsius and Babel Finance.

Unlike DeFi lending platforms where overcollaterisation is always ensured by a smart contract and assets are only lent to users on the platform, CeFi lending providers may not always be over­collateralizing their transactions, which exposes users’ funds to default risks.