Jane Dotson
BlockFi is a platform that allows users to earn interest on their cryptocurrency holdings and use them as collateral for loans. However, it does not offer the same protections as traditional savings accounts, such as FDIC or SIPC insurance. While BlockFi claims its funds are insured, the details of this insurance are unclear, and it is not equivalent to the insurance provided by banks or brokers. This lack of insurance is a concern for some users, especially given the history of hacks and the volatility of the crypto market. As a result, some users have expressed a willingness to pay a fee for insurance to protect their funds.
| Characteristics | Values |
|---|---|
| Funds insured by BlockFi | No federally backed insurance protection |
| Types of insurance absent | FDIC insurance, SIPC insurance |
| Insurance against | Hacks |
| Not insured against | Loans that default |
| Collateralization | Over-collateralization |
| Custodial insurance | $375 million |
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What You'll Learn
BlockFi funds are not FDIC-insured
BlockFi is not a bank or a broker, and therefore it does not provide the same protections as a traditional savings account. The lack of FDIC and SIPC insurance is a significant risk to consider when deciding whether to use BlockFi's services. While BlockFi claims its funds are "insured", it is not clear how this insurance works or how reliable it is.
It is worth noting that BlockFi has experienced security issues in the past. In May 2020, BlockFi was hacked, although no funds were lost. Additionally, BlockFi has removed many free monthly withdrawals, and its valuation has dropped by over 80-90% according to some sources. These issues highlight the risks associated with using BlockFi and other cryptocurrency platforms that do not offer FDIC or SIPC insurance.
While BlockFi does not offer FDIC or SIPC insurance, it does provide some security measures to protect your assets. For example, BlockFi offers two-factor authentication and allows listing for its wallet service. Additionally, BlockFi's custodian, Gemini, holds the majority of crypto in cold storage to keep assets safe. However, these security measures do not replace the protections provided by FDIC or SIPC insurance.
Overall, it is important to understand that BlockFi funds are not FDIC-insured and do not have the same protections as traditional bank accounts. If you are considering using BlockFi, it is crucial to carefully evaluate the risks and understand that your funds may not be fully protected in the event of a failure or security breach.
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BlockFi claims to purchase private insurance
BlockFi is a platform that lets users buy, sell, and trade cryptocurrencies. It also allows users to borrow cash and earn interest on their crypto assets. However, BlockFi does not offer FDIC or SIPC insurance like traditional banks or online brokers. FDIC insurance protects bank depositors against losses, while SIPC insurance protects investors against the loss of cash and securities.
While BlockFi does not provide FDIC or SIPC insurance, it does offer $375 million in custodial insurance and implements security measures to protect user assets. For example, BlockFi's Wallet feature allows users to securely store their crypto using two-factor authentication and allowlisting. Additionally, BlockFi's custodian, Gemini, holds the majority of crypto in cold storage to keep assets safe.
It is worth noting that BlockFi has experienced security breaches in the past. In May 2020, BlockFi was hacked, although no funds were lost. This incident highlights the importance of insurance and robust security measures in the cryptocurrency space, where hacks and cyberattacks are common.
Overall, while BlockFi claims to have private insurance, the details of this insurance are unclear, and users should carefully consider the risks before depositing their funds on the platform.
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BlockFi funds are not SIPC-insured
BlockFi is a platform that allows users to use cryptocurrency to earn interest or as collateral for a loan. It also offers a wallet service for securely storing crypto with two-factor authentication and allows listing. The platform also enables users to borrow cash and buy or sell various cryptocurrencies. However, it is important to note that BlockFi funds are not insured by the Securities Investor Protection Corporation (SIPC).
SIPC insurance is a type of protection that covers the loss of cash and securities. Most investors are covered for $500,000, including a $250,000 limit for cash. This insurance provides peace of mind for investors, knowing that their funds are protected in the event of a financial institution's failure. Unfortunately, this safety net is not available for BlockFi customers.
The lack of SIPC insurance means that if BlockFi were to fail as a business, its customers would not have the same level of protection as they would with a traditional bank account or brokerage account. This is because BlockFi is not a bank or a broker, and its products, such as the BlockFi Interest Account (BIA), are not considered the same as traditional savings accounts. As a result, customers could potentially lose their funds without any recourse or compensation.
While BlockFi claims that its BIA funds are "insured," it does not provide clear information on how this insurance works or its reliability. There is a general lack of transparency around the insurance backing its accounts. Additionally, BlockFi has been criticised for its opaque pricing structure for crypto trades, with varying fees making it challenging for customers to understand the exact costs involved.
It is worth noting that BlockFi does offer $375 million in custodial insurance, and its custodian, Gemini, employs robust security practices, such as holding the majority of crypto in cold storage. However, the absence of SIPC insurance remains a significant consideration for potential customers who value the added security provided by traditional financial institutions.
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BlockFi's over-collateralisation
BlockFi is a company that lets crypto investors use their cryptocurrency to earn interest or as collateral for a loan. It also allows investors to borrow cash and buy or sell various cryptocurrencies using the platform and mobile app. However, BlockFi accounts do not come with the same protections as a traditional savings account that comes with FDIC insurance. BlockFi accounts also come without SIPC insurance, which is a type of insurance that protects against the loss of cash and securities.
BlockFi claims its BIA funds are “insured”, but it’s not clear how that insurance works or how reliable it is. BlockFi has also been criticised for its lack of transparency around the terms and risks of crypto lending products. In fact, the company has been deemed an unregistered investment company by the SEC, which has resulted in a $100 million settlement.
BlockFi does, however, offer what it calls "over-collateralisation". This means that if a borrower wants $100,000 worth of bitcoin from BlockFi, BlockFi will analyse the credit risk of the borrower and what the borrower plans to do with the bitcoin, and then determine how much bitcoin the borrower needs to put up in case they default. So, in this example, if the borrower wants to borrow $100,000 worth of bitcoin, BlockFi will tell the borrower they need to put up $125,000, $150,000 or $200,000 of their own bitcoin or other collateral that BlockFi will hold while the borrower is using their bitcoin.
This over-collateralisation is designed to protect BlockFi in case the borrower defaults or if BlockFi gets uncomfortable with the borrower and calls in the loan, which it can do at any time. In one instance, BlockFi exercised its judgement and fully liquidated or hedged all the associated collateral on an overcollateralized margin loan.
While this over-collateralisation may offer some protection for BlockFi, it does not provide insurance for its customers in the same way that traditional banks do.
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BlockFi's $227 million in uninsured funds
BlockFi is a crypto lender that allows investors to use their cryptocurrency as collateral for loans or to earn interest. BlockFi's bankruptcy filing in November 2022 revealed that the company had $227 million in uninsured funds in Silicon Valley Bank's money market mutual funds investment. This amount is not protected by FDIC insurance or any other type of insurance, and as a result, BlockFi may lose claims to this money.
The lack of insurance on these funds means that BlockFi's creditors, such as FTX US and the Securities and Exchange Commission, may not be fully repaid. This exposure to Silicon Valley Bank, which recently filed for bankruptcy, adds to BlockFi's financial woes. BlockFi had already been struggling after the collapse of FTX, with $355 million stuck in the crypto exchange.
The $227 million in uninsured funds is significant, and it is not yet clear how this will impact BlockFi's operations and ability to repay its creditors. The company's failure to safeguard these funds and ensure compliance with bankruptcy laws could have serious repercussions.
While BlockFi claims that its funds are "'insured'", the details of this insurance are unclear, and it does not appear to cover all risks. The company's exposure to SVB's financial troubles highlights the risks associated with investing in crypto lenders and the need for better insurance options in the industry.
Overall, BlockFi's $227 million in uninsured funds in Silicon Valley Bank is a concerning development for the company and its creditors. The lack of insurance and compliance issues could have significant implications for BlockFi's future operations and ability to protect investor funds.
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Frequently asked questions
No, BlockFi is not a bank or broker, so it does not offer FDIC insurance.
No, BlockFi does not offer SIPC insurance either.
BlockFi claims to purchase private insurance to cover depositor funds. However, it is not clear how this insurance works or how reliable it is.
Collateralization is a form of protection where a borrower provides collateral, usually in the form of cryptocurrency, to secure a loan. In the case of BlockFi, this is called "over-collateralization", where the borrower must put up more collateral than the value of the loan.
Yes, Nexo and Celsius are two popular alternatives that offer insurance for their crypto services. However, Celsius paused withdrawals in June 2022 and has been at risk of insolvency, so caution is advised.
