QUADRIGA INITIATIVE
CRYPTO WATCHDOG & FRAUD RECOVERY PLATFORM
A COMMUNITY-BASED, NOT-FOR-PROFIT
$10 000 000 USD
MAY 2021
UNITED STATES
BLOCKFI
DESCRIPTION OF EVENTS
"BlockFi is a crypto management platform that lets you leverage your cryptocurrency and put it to fair use." "This platform has been around since 2017, and while it’s independently owned, several financial giants like SoFi and Fidelity back it." "At BlockFi, you can earn up to 8.6% interest per year on your cryptocurrency holdings, borrow cash, buy and sell crypto, and access other bank-like services. It’s like an all-in-one crypto bank." "Today, a growing number of users are using BlockFi as a bank for their cryptocurrency. Just like you use Bank of America or a Credit Union for your fiat currency, you can use BlockFi for your cryptocurrency."
"BlockFi [recently] introduced trading at no fees for Bitcoin, Ethereum and the stablecoin GUSD. The startup has been known to allow users access to returns on their cryptocurrency holdings by offering loans to borrowers against users’ cryptocurrency holdings and then passing across the returns in terms of interest on the loans while securing the crypto assets that were used as security for the loans."
"Blockfi mistakenly overpaid bonuses to a group of customers, with some receiving up to 700 BTC in their accounts. According to reports, these payments were related to a stablecoin promotion Blockfi is running, that would give additional benefits to customers to maintain a determinate balance of dollars in their Blockfi Interest Accounts. The bonuses also included income from enrolling partners into the platform."
"Blockfi wrongly distributed a set of payments to a group of customers, who found deposits of up to 700 BTC in their accounts." "The payments were associated with a promotion they were running, in which users would receive bonuses in USD stablecoins." "The promotion was intended to be “paid out in one lump sum in GUSD” according to their website. Instead, some accounts were paid the amount denominated in Bitcoin, with some receiving over 700 BTC (worth >$28,000,000 at current prices)."
"While the crypto lender said it was fewer than 100 coins, the firm’s exposure is believed to be around $10m, though that amount is decreasing as more users return the coins." “The net impact to BlockFi’s was sub-100 clients that actually were impacted by this and less than $10 million USD in total value,” "said Zac Prince, co-founder and CEO of BlockFi."
"While most weren’t able to withdraw these funds, in the confusion, other customers that applied for withdrawals are now being threatened with legal actions against them."
"The drama that ensued illustrates a tension with centralized platforms. One of the key innovations behind bitcoin is that transactions are not supposed to be reversible. But centralized platforms like BlockFi seem pretty willing to try."
"“They had gone to the transaction history and inserted a transaction reversal of negative 329 BTC directly above where the deposit had originally shown up,” said Levine[, one of the users affected]. “So it’s very suspicious that could, number one, represent it as being the same exact time in the day and on the same date, but they also superseded any of the following transfers in chronological order.”"
"One user has reportedly posted a photograph of an email allegedly from BlockFi notifying them that “failure to return the erroneously received assets by 5.00 PM EDT today (May 18th, 2021) may constitute a crime and will result in BlockFi taking legal action.” The company has also offered clients a $500 payout in Gemini Dollars (GUSD) as compensation for “any trouble this may have caused.”"
"Another Reddit user in the r/blockfi thread has alleged that “2 days after their blunder, I made a withdrawal of USDC which I had deposited a month earlier. Completely unrelated to their claim. Now they send me an email accusing me of withdrawing funds that aren’t mine saying it’s fraud and a crime they will act on if not returned in the next 2 hours.”"
“I don’t think it’s too big of a topic,” he said. “We processed the promo payout and there was a bug and an error made where we processed it in bitcoin instead of in dollars. I think things got a bit confused online because there were some users who, for an hour, had 700 bitcoin show up in their BlockFi account. That was very quickly changed and corrected.”
"BlockFi holds crypto and dollars on our balance sheet as part of our normal operating procedures. The outstanding amounts are a small fraction of the loss reserves that we plan for as part of our normal accounting policies."
"We have learned from this mistake and have immediately implemented procedures to prevent issues like this from occurring in the future. Our business continues to operate normally at this time. We sincerely appreciate our clients for working with us through this time."
"BlockFi announced June 25 the lower interest rates on deposits of crypto including bitcoin, ether (ETH, -4.27%), chainlink (LINK, -3.44%), litecoin (LTC, -5.66%) and a few others will go into effect July 1. The annual percentage yield (APY) for bitcoin deposits larger than 20 BTC, for example, will go down to 0.25% from 0.5%."
“Rates on cryptocurrencies held in BIA (BlockFi Interest Account) are primarily driven by demand by institutional investors for borrowing these assets,” Rishi Ramchandani, director of business development at BlockFi in Asia, told CoinDesk in an email response. “When institutional investors demand changes, that affects the rates we can offer our BIA clients.”
As the story goes, BlockFi accidentally paid out bitcoin instead of USD to customers in their accounts.
Some sources mention that they continued to have these bonuses for months.
They then, in some cases, let customers withdraw these funds. BlockFi reports this was limited to 100 accounts.
In most cases, it seems like they've been successful to get the funds back.
HOW COULD THIS HAVE BEEN PREVENTED?
The BlockFi situation is unique in that they gave such a large bonus, that they openly and publicly admitted their mistake, and that they continued to operate withdrawals during the time period.
It does not seem like this situation caused a loss to platform users, and was instead borne by the platform itself. Using a multi-signature arrangement on larger withdrawals would have prevented the more significant cases of loss, while platforms should likely consider that some mistakes could be made on individual transactions.
Blockfi Messes up Promo Payments: Transfers up to 700 Bitcoin Mistakenly – Bitcoin News (May 27)
Cryptocurrency company Blockfi accidentally sends users millions in bitcoin – and now it wants it back | The Independent (Jun 4)
BlockFi Review: Does BlockFi Work? Is It Legit or Too Risky? | Observer (Jul 5)
BlockFi Offers Zero-Fee Trading for Bitcoin, Ethereum and GUSD Stablecoin (Jul 5)
BlockFi Rate Cut on Bitcoin Deposits Leaves Rivals Scratching Heads - CoinDesk (Jul 5)
@AaronSchottEMMD Twitter (Jul 5)
BlockFi Review 2021: Fees, Services & More (Jul 5)
BlockFi Mistakenly Deposits Outsized Bitcoin Payments (Jul 6)
@JamesLawblock Twitter (Jul 6)
@Tylerban Twitter (Jul 6)
Cryptocurrency: Bitcoin falls back below $40,000 as BlockFi mistakenly sends users coins (Jul 6)
BlockFi's Botched Promo Payouts Continued Into April - CoinDesk (Jul 6)
@BlockFi Twitter (Jul 6)
@blockfi Twitter (Jul 6)
BlockFi mistakenly credits users with too much Bitcoin in promo payout (Jul 7)
Falsely accused by Blockfi of crime and a fraudulent withdrawal : blockfi (Jul 7)
