Foreign What's up, guys, and welcome back to Wall Street Millennial On this channel, we cover everything related to socks and investing. Up until recently, Blockfy was one of the most popular crypto Platforms in the US With millions of users depositing well in excess of three billion dollars, they offered features allowing people to buy and sell crypto, as well as a crypto credit card which offered up to 3.5 cashback paid in Bitcoin. But their most compelling value proposition by far was their lending feature where depositors could earn as much as four percent on their Bitcoin Holdings and 7.5 on their stable coin. Holdings This was far in excess of what Traditional Banks offered on savings accounts.

So where'd this money come from? Well, many people like to believe that cryptocurrencies have magical powers which allow them to create value out of thin air. This is unfortunately not the case. Blockfy earned interest for its depositors by lending their funds out to third parties. very similar to traditional.

Banks The only difference is that they took on a lot more risk. One of their biggest debtors was a secretive crypto hedge fund Three Arrows Capital who reportedly borrowed 1 billion dollars from Blockbi when Three Arrows Capital imploded this past. June They defaulted on the loan, pushing Block Pie to the brink of insolvency like a white knight. Sam Bateman Freed stepped in to save Block-fi by extending a 400 million dollar credit facility to the distressed crypto lender with the backing of one of the most respected crypto industry.

Titans Blocked By was able to honor customer withdrawals and it looked like everything was safe. Fast forward five months in November FTX collapses and just a couple weeks later, Block Buy also halts customer withdrawals and files its own bankruptcy proceedings in the bankruptcy court. Blockbi is now saying that FTX and Alameda defaulted on one billion dollars worth of loans that they owe to Block Fi. So what is going on? FTX and Sam Makeman Freed supposedly bailed out blocked by this past summer.

How can it possibly be the case that they actually owe money to Block? Phi? In this video, we'll uncover the tangled web that is the Block 5 bankruptcy and try to determine how much money if any Blockfight customers can ever hope to get back. Blockfy is one of the many crypto lending platforms which grew to prominence over the past few years. In 2020, the Federal Reserve took short-term interest rates down to zero, and almost all banks followed suit on their savings accounts. In this environment, Blocked by its crypto lending solution appeared very attractive.

Who doesn't want to make 8 on their stablecoin deposits instead of .07 at a Traditional Bank During the Crypto Bull Run of 2022, Block Pie was able to raise hundreds of millions of dollars from some of the most prestigious investors on Wall Street and in Silicon Valley Their investors included PayPal founder Peter Thiel's Venture Capital fund, Coinbase's Venture Capital fund the massive hedge fund Tiger Global as well as a private Equity Giant Ban Capital which was co-founded by Nit. Romney. Although Romney was no longer involved with the company when they made the block by investment, they used this money to run massive advertising campaigns primarily on YouTube sponsoring Finance related YouTubers to promote Block Fight to their audiences. But there was one problem: What Blockfy was doing was illegal under U.S Securities Law You have to register with the SEC and meet various requirements to offer interest bearing products.

Blockfy did not do this. So in February of 2022, the SEC fined Blocked by 100 million dollars and told them that they had to stop opening new interest-bearing accounts in the U.S However, accounts that were already open prior to the settlements were allowed to continue in their non-us operations were not affected at all. So, while their growth prospects in the U.S were severely constrained for the most part, they continued to operate business as usual. But things were about to get a lot worse in May the algorithmic stablecoin UST collapsed along with its sister token Tara Luna Terra Luna was a Ponzi scheme that was destined to collapse from the very beginning.

If you want to learn more about it, check out the video we made about this at the time. Link in the description below. While Blockpy did not invest directly into UST or Luna, they were still impacted by the contagion. To understand this, we have to look at who Blocked By was lending money to a Traditional Bank generates interest income by lending money to homeowners or businesses.

These loans are generally backed by real assets as collateral. For example, if you default on your mortgage, the bank can foreclose your house and make back most, if not the entire value of the loan. This makes it very safe. From the bank's perspective, The problem is the traditional banking industry is well established and Incredibly competitive, so the banks can't charge high enough interest rates to cover anything close to the eight percent yields that Blockbie was paying.

The only way that Blockfy could generate these high yields was to take on Far More risk. This risk came in the form of lending money to weird crypto hedge funds like three arrows Capital who would then use the borrowed funds to make complex and risky crypto Investments Three Arrows Capital was a large investor in the UST Stablecoin when this collapsed three eras, went bankrupt and defaulted on blocked by his loan. This pushed Blocked by to the brink of insolvency, but they were able to continue operating by securing a 400 million dollar bailout loan from FTX Us. It looked like everything was going fine with a 400 million dollar loan from FTX Us.

Block 5 was saved from the three arrows Capital Fallout And since the credit line was subordinate to customer deposits, It could only be good for customers. But the relationship between Blockbi and Spf's companies was far more complicated than originally thought of. The 400 million credit facility blocked by only borrowed 275 million. so there was a flow of 275 million dollars from FTX to Block Fi, but at the same time blocked by deposited 355 million dollars onto the FTX exchange.

So this is money flowing from Blockfi back to FTX. In addition, blocked by lent 680 million dollars to Alameda Research: Alameda Research is technically a separate company from FTX, but it's all controlled by Sam Binkman Free and as we've seen with the FTX bankruptcy, FTX and Alameda co-mingled their funds. When you add everything together, there is a net outflow of 760 million dollars from Blockbi to entities associated with Sam Bankman Freed. So did SPF really bail out Blockfi? or did block by bailout? SPF Within weeks of the FTX collapse, Blockfi also halted withdrawals and filed for chapter 11 bankruptcy.

They specifically called out the one billion default from FTX in Alameda as a reason for their bankruptcy. The problem is: FTX and Alameda are also bankrupt and they don't have the money to pay their own depositors, let alone blockify. This puts Blockfi in a very difficult position. It also raises questions about why SBF decided to bail out Blockfi in the first place.

Had Block 5 gone bankrupt, the bankruptcy court may have tried to liquidate Alameda's loan by bailing out Blocked by. He could prevent this from happening or at least delay it. And did it happen? You didn't think it had any impact. it.

would have had no impact on Alameda or FTX if for example, Block 5 were to have failed I I Don't think it would have had large direct impact. And the reason I say that is that I believe that Alameda ended up returning vast majority of its open you know, borrowers of its marching positions with the bar lending desks in the middle of this year anyway, and so at that point there wasn't that much left to to save from that um uh, you know the uh Sam Binkman Freed almost always says I think or I believe before he answers any hard questions. This may be an attempt to avoid criminal liability when the facts come out and they completely contradict his public statements. Assuming that Block by statements and his bankruptcy filings are true, they have significant loans outstanding to Alameda To this day, loans that SBF claimed were wound down during the summer.

Now we know how Blockfy got into the mess. The most important question is what will happen to the hundreds of thousands of customers who have lost in many cases their life savings according to its bankruptcy filing. Block FiOS 3.1 billion dollars to its top 50 creditors. Its single largest Creator is the Ancura Trust, which acts as a trustee for Blockfi's interest-bearing crypto accounts.

All of these accounts together some to 730 million dollars. The second largest creditor is FTX us to whom they owe 275 million dollars. This is in relation to the bailout that they received this past summer. Interestingly, their fourth largest creditor is the U.S Securities and Exchange Commission to whom they owe 30 million dollars.

This is in relation to the 100 million dollar settlement that they agreed to pay this past February So far, they've only paid 70 million dollars of it. This puts the SEC in a position where they will be competing with retail investors to get money out of the bankruptcy court. The rest of the creditors are customers who presumably had their funds in Block Fi, but not in interest bearing accounts as these would have been included in the Ankura Trust. The question is: does Blockfi have the funds to cover the over 3 billion dollars of liabilities in May of this year.

San Mateman Freed acquired a 7.6 stake in the online stock brokerage company Robinhood under an Antigua based shell company called Emergent. Fidelity Technologies According to Block Fi, Alameda used this Robin Hood stake as collateral to secure its 680 million dollar loan. This flies in the face of Spf's claims that he was not operationally involved in. Alameda Robin Hood currently has a market cap of 8.8 billion dollars, making the 7.6 stake worth a little under 700 million dollars.

and this is just enough to cover Alameda's loan. Thus far, Alameda has refused to turn the Robin Hood stake over to Block Pie, but if SPF did, in fact post the Robin Hood shares as collateral, the bankruptcy court should be able to compel Alameda to hand it over. There's still another 355 million dollars at Blockfi deposited into FTX. This money is probably gone for good, but maybe they can work out a deal whereby the 275 million dollars that they still owe to FTX Us can be netted off from the money they deposited into FTX.

However, it's unclear if the deposits were in FTX Us or FDX International. if the latter is the case, this would complicate things. It's unclear what financial problems blocked by may or may not have beyond the direct exposure to FDX. We know they have a track record of lending money to untransparent crypto hedge funds like Three Arrows Capital in Alameda.

There may be other creditors who have defaulted during the recent crypto crash, but assuming that they are able to secure the roughly 700 million dollars of Robin Hood shares, they will be able to pay at least something to their customers, even if it ends up being Pennies on the dollar. Besides the obvious lessons of not trusting unregulated crypto platforms promising suspiciously high yields, the next lesson of the Blockify story is that you can't rely on the SC Cc to protect you. SEC Commissioner Gary Gensler has long been a crypto skeptic and has talked about the need to bring more regulation, but the disastrous collapses of Celsius Voyager FTX and now Block 5 have all happened under his watch. He even knew about Blockbie's illegal practices since February but instead of shutting down the platform, he just gave them a 100 million dollar fine and allowed existing accounts to continue operating.

If anything, the Sec's actions only made things worse as the 100 million dollar settlement will decrease the pool of funds available for customers. It's not the CEOs or investors who will ultimately bear the cost of the settlement. it's the retail investors who have already lost almost everything. In light of all the crypto scams have been exposed over the past year, the value of Bitcoin has declined by more than 60 percent.

Hopefully, this will be the final nail in the coffin for the disastrous crypto hysteria that has gripped the investing community over the past two years. With the collapse of FTX and the complete failure of the SEC to protect investors, it's finally clear that no centralized crypto exchanges can be trusted. The quicker people realize this and withdraw whatever money they still have left, the better off they will be. alright.

Guys, that wraps it up for this video. What do you think about the Block by Bankruptcy? Does crypto have any future at all? after all the disasters of 2022? Let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one. Wall Street Millennial Signing out.