BlockFi faces backlash over custom interest rates after pocketing $35 million in crypto-deposits

On 4 March, the cryptocurrency lending platform, BlockFi, launched the world’s first cryptocurrency-based savings account. It saw a massive $35 million in deposits, with the average balance ranging around $40,000. This is an indication of the cryptocurrency industry slowly edging towards more mainstream crypto-products around interest-bearing loans.

BlockFi set the cryptoverse abuzz after announcing a 6.2 percent annual interest rate for their savings account. The account presently accepts the top two cryptocurrencies, Bitcoin [BTC] and Ethereum [ETH], with an initial deposit quantity of 25.

However, BlockFi later clarified that the rate was changed on a monthly basis, based on a combination of rates the company sees in the institutional crypto-borrowing market, and the cost of customer acquisitions, Zac Prince, BlockFi’s Chief executive, said.

The fine print in the terms statement of the savings accounts, further points to a flexible interest rate. Despite touting a 6.2 percent annual interest rate, the terms read,

“We will determine the interest rate for each month in our sole discretion, and you acknowledge that such rate may not be equivalent to the benchmark interest rates observed in the market for bank deposit accounts.”

BlockFi faced severe backlash following the misleading advertisement, and buzz around their accounts. Several cryptocurrency proponents stated that the company will not give out a 6.2 percent rate, especially in such a volatile cryptocurrency market.

Prince tried to ease the concerns of the disgruntled community, stating,

“We expect the interest rate in the account to be higher in times when prices are falling, and lower when prices are rising because demand to borrow Bitcoin is partially driven by market sentiment.”

He also stated that the company was expecting a bull-run in the long-term, which will lead to lower interest rates being offered by BlockFi.

BlockFi did not try to suppress opposition arguments against their products and has, in fact, attested that the interest rate will “definitely” change with the market.

Prince added,

“We didn’t launch with a 6 percent rate with the intention of changing it one month later and pulling a big gotcha on everybody. That would be really bad business.”

Like any other depository system, the funds deposited with the platform will be lent out, within the crypto-space itself. BlockFi lends out the cryptocurrency funds to traders for arbitrage, short-selling or market making purposes at a whopping 12 percent. The lending platform’s assets are backed by the Winklevoss twins’ Gemini Trust Company LLC, which is under the regulatory oversight of the New York Department of Financial Services.

BlockFi maintained that the risk offered by the savings account was no more than the overarching volatile cryptocurrency market. Prince quantified this as a “systematic risk,” in tying it to the function of the Bitcoin blockchain, and its influence on the price.

The lending platform is primarily backed by Mike Novogratz’s Galaxy Digital Investments. The crypto-bull’s venture capital firm led a $52.5 million fundraising round for BlockFi back in July 2018. Other backers of BlockFi include Susquehanna, Morgan Creek Digital, ConsenSys Ventures, SoFi, Fidelity, Coinbase Ventures and Akuna Capital, among others.

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