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How FTX’s Collapse Exposed the Risks of Crypto Lending

Alameda Research, BlockFi, Crypto Lending, FTX, Sam Bankman-Fried, Zac Prince

The trial of Sam Bankman-Fried, the co-founder of FTX and Alameda Research, has revealed the complex and risky nature of crypto lending, a business that was at the heart of his alleged fraud scheme.

According to the prosecution, Bankman-Fried used FTX customer funds to engage in speculative and illiquid trading at Alameda, a hedge fund that he also controlled. He allegedly manipulated the balance sheets of both entities to hide his losses and deceive his lenders and clients.

One of those lenders was BlockFi, a crypto lending platform that filed for bankruptcy in November 2022, shortly after Alameda and FTX collapsed. BlockFi’s CEO, Zac Prince, testified on Friday that his company had about $1 billion in total exposure to Alameda and FTX at the time of their failure.

Prince said that BlockFi lent money to Alameda based on unaudited balance sheets that showed billions of dollars in assets. He also said that BlockFi used FTX as a custodian and trading platform for its crypto assets. He claimed that BlockFi would not have gone bankrupt if Alameda had repaid its loans and FTX had not frozen its funds.

However, the defense lawyers argued that BlockFi was aware of the risks involved in lending to Alameda and using FTX. They said that BlockFi conducted its own due diligence and stress-testing on Alameda’s collateral, which consisted of tokens affiliated with FTX. They also said that it was common practice in the crypto industry to provide unaudited balance sheets to lenders.

The trial of Bankman-Fried, which began on Jan. 10, is expected to last for several weeks. He faces charges of wire fraud, securities fraud, and money laundering, which carry a maximum sentence of 20 years in prison. He has pleaded not guilty and maintains that he acted in good faith and in compliance with the law.

The case against Bankman-Fried is one of the most high-profile prosecutions in the crypto space, which has been plagued by scandals, hacks, and regulatory crackdowns. It also highlights the challenges and dangers of crypto lending, a fast-growing but largely unregulated sector that offers high returns but also high risks to both lenders and borrowers.

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