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The Extraordinary Journey of Crypto Unicorn BlockFi

In the rapidly evolving world of cryptocurrency, few companies have made as big an impact in as short a time as BlockFi. Founded just five years ago, this pioneering startup has grown from a niche player to a fintech powerhouse with over $10 billion in assets, backing from top VCs, and a valuation that hit $3 billion in March 2021. BlockFi‘s meteoric rise has not been without challenges, however, as the company‘s trailblazing crypto lending and savings products have drawn increasing scrutiny from regulators. In this deep dive, we‘ll explore BlockFi‘s fascinating history, business model, successes, controversies, and future outlook.

Humble Beginnings

BlockFi was founded in August 2017 by Zac Prince and Flori Marquez with a grand vision: to create financial products that could expand access to wealth creation through cryptocurrency. Prince and Marquez saw an opportunity in providing credit services to crypto investors who wanted to borrow against their digital assets, rather than sell them outright.

As Prince recounted to Forbes, the idea for BlockFi was born out of his own frustrations as an early Bitcoin investor. "I would personally guarantee a loan and take my friend‘s Bitcoin, then deposit it into an exchange and borrow against it," he said. "That‘s what gave me conviction on the concept."

Prince had a background in consumer lending from his time at fintech startups like Orchard Platform and Zibby. Marquez, meanwhile, had worked in bond trading at Jefferies. Together, they brought a combination of traditional finance chops and crypto native understanding to the table.

Rapid Growth and Institutional Backing

BlockFi started out in 2017 by offering crypto-backed USD loans – one of the first in the industry to do so. Users could get quick access to liquidity without having to sell their crypto holdings. The service was an instant hit with retail crypto investors.

The young startup soon caught the attention of some heavy hitters in venture capital. In February 2018, just six months after launching, BlockFi raised $1.55 million in a seed round led by ConsenSys Ventures, with participation from SoFi, Kenetic Capital, and Galaxy Digital.

BlockFi‘s momentum continued to build in 2019. In August of that year, the company secured $18.3 million in Series A funding led by Valar Ventures, the VC firm co-founded by PayPal co-founder Peter Thiel. The round also included Winklevoss Capital, Morgan Creek Digital, Akuna Capital, and earlier investors Galaxy Digital and ConsenSys.

2020 was a breakout year for BlockFi even amidst the disruptions of the COVID-19 pandemic. In February, the company raised $30 million in Series B funding led by Valar Ventures. Then in August, BlockFi landed a whopping $50 million Series C round led by Morgan Creek Digital, with participation from Valar and Winklevoss Capital.

At the same time, BlockFi was expanding its business lines beyond just crypto-backed loans. In March 2019, the company launched the BlockFi Interest Account (BIA), which allowed users to earn annual yields as high as 9.5% on their crypto holdings – a rate unheard of in the traditional savings world.

BlockFi also rolled out a trading platform in December 2019, followed by a Bitcoin rewards credit card in May 2020. By October 2020, BlockFi was managing over $1.5 billion in assets and generating $50 million in monthly revenue, according to the Wall Street Journal.

The company‘s rapid growth and institutional backing set it apart from many other players in the crypto lending space. As Prince told Bloomberg, "We want to be the adults in the room…Working with regulators and having investors like Bain Capital Ventures, gives our clients a lot of confidence."

A Cutting-Edge Crypto Financial Ecosystem

At the core of BlockFi‘s business model are its innovative crypto financial products. Let‘s take a closer look at how they work:

BlockFi Interest Account (BIA)

  • Allows users to earn up to 9.5% APY on their crypto holdings (rates vary by asset and tier)
  • No minimum deposit or hidden fees
  • Monthly compounding interest
  • Powered by Gemini as BlockFi‘s primary custodian
  • Positioned as an alternative to low-yield traditional savings accounts

Trading Platform

  • Buy, sell, and trade cryptocurrencies
  • Instant trades between assets like BTC, ETH, LTC, PAXG, USDC, GUSD
  • Advanced charting and order types
  • No hidden fees or minimum balances
  • Fiat on-ramp supporting wire transfers and ACH deposits

Crypto-Backed Loans

  • Borrow USD against crypto holdings
  • Loan-to-value (LTV) rates from 20-50%
  • Same-day funding, affordable rates
  • No credit check or proof of income required
  • Minimum loan of $10,000

Bitcoin Rewards Credit Card

  • Visa card offering up to 3.5% back in Bitcoin on purchases
  • $200 in Bitcoin sign-up bonus
  • No annual fee, no foreign transaction fees
  • Accepted anywhere Visa is accepted

By offering this suite of products, BlockFi aims to be a one-stop-shop for crypto financial services – a crypto bank, in essence. As of March 2022, the company boasted over 1 million users worldwide, with clients in over 100 countries.

Challenges and Controversies

BlockFi‘s journey has not been without speed bumps. As a centralized entity offering yield on crypto deposits, the company has drawn skepticism from some in the crypto community who argue such services defeat the purpose of decentralized finance (DeFi).

More concerningly, BlockFi has faced mounting regulatory scrutiny over the past year. In July 2021, securities regulators in Alabama, New Jersey, and Texas issued show cause orders to BlockFi alleging that its BIAs were unregistered securities offerings. Several other states soon launched their own investigations.

The regulatory pressure came to a head in February 2022, when BlockFi reached a $100 million settlement with the SEC and 32 state regulators. The SEC charged that BlockFi failed to register offers and sales of its interest accounts, which the agency deemed to be securities.

As part of the settlement, BlockFi agreed to pay $50 million to the SEC and another $50 million to the states. The company also agreed to cease offering BIAs to new U.S. customers and work to bring its business into compliance with U.S. investment laws. Existing American clients could continue earning interest on their current BIA assets but not add new assets.

The landmark enforcement action sent shockwaves through the crypto industry and highlighted the murky regulatory environment for digital asset lending products. BlockFi was not the only company affected – competitors like Celsius, Nexo, and Voyager soon faced similar cease and desist orders from state regulators.

The Road Ahead

Despite the regulatory headwinds, BlockFi has continued to grow and innovate. In January 2022, the company announced the launch of the BlockFi Bitcoin Trust (BBTY), an SEC-registered investment vehicle providing investors with exposure to Bitcoin through a traditional financial product.

BlockFi has also hinted at plans to expand its credit card offerings to include rewards paid in Ether and other digital assets beyond Bitcoin. The company has a waitlist for a crypto rewards credit card that pays out in multiple coins.

Looking ahead, BlockFi‘s future prospects are closely tied to those of the broader crypto markets, which are notoriously volatile. The company has weathered downturns before – it laid off 20% of its staff in June 2022 citing "crypto winter" – but sustained price declines could dampen consumer demand for crypto lending and borrowing.

New regulations could also drastically change the playing field. President Biden‘s executive order on cryptocurrencies from March 2022 called for a wide-ranging review of the crypto industry, with the potential for much tighter oversight to come. As a U.S.-based company, BlockFi is particularly exposed to American regulatory risk.

Yet BlockFi‘s proponents believe the company is well-positioned to thrive long-term, even in a more regulated future for crypto. With its battle-tested team, diversified product lines, and institutional-grade platform, BlockFi has the ingredients to continue leading the way in bridging the worlds of traditional and decentralized finance.

"Digital assets are going to be the preferred financial instruments of the future," Marquez wrote in a blog post. "At BlockFi, we‘re excited to continue building this future, while expanding access to financial services for all." Only time will tell if that lofty vision becomes reality, but one thing is certain – it‘s been a heck of a ride for BlockFi so far.