During the trial of Sam Bankman-Fried on October 13, evidence revealed that the BlockFi team had warned its leadership in August 2021 about the cryptocurrency lender's heavy investment in FTX Token (FTT). A credit note prepared by the BlockFi team in August 2021 recommended a loan to Alameda Research of 10,000 Bitcoin (BTC), valued at nearly $470 million at that time. Although BlockFi founder and former CEO Zac Prince testified that the loan was initially denied, Alameda went on to borrow substantial amounts through BlockFi in the following months, accumulating $1 billion in loans by the second quarter of 2022. Prince stated he was unaware that Alameda was using funds from FTX customers to repay these loans.
The BlockFi team had also outlined stress scenarios in 2021, one of which posited that a default by Alameda, triggering simultaneous repayment demands, could lead to a 60% to 75% drop in FTT's price within a day. Despite this, another stress assessment from the same period indicated that even if all collateral were to decline by 100%, FTX would still have a positive asset balance of $638 million, based on a consolidated balance sheet filed by Alameda.
The relationship between Alameda and BlockFi began in late 2021, with an initial $15 million loan to Alameda. However, Prince mentioned that while Alameda conducted due diligence on multiple divisions of BlockFi, it received unaudited financial documents. Alameda funded its operations through term loans, allowing borrowers, such as BlockFi, to demand fund repayment at any time. In June 2022, after the Terra ecosystem's collapse, BlockFi took back millions of dollars in loans held by Alameda.
BlockFi had filed for bankruptcy when it became evident that its funds were compromised, and loans could not be repaid. Prince clarified that, despite the challenges of the bear market, BlockFi would not have filed for bankruptcy without the collapse of FTX, an event that significantly impacted both companies.
