Whistleblowers level accusations against China's biggest crypto lender: Babel Finance

Babel Finance, one of China’s biggest crypto lenders and asset managers is coming under fire for allegedly misusing investor and client funds.

Anonymous critics have been leaking to the media and posting to Twitter and YouTube an alleged recording of Del Wang, Babel’s co-founder, in which he apparently admits that the firm has been taking risky, highly leveraged positions with client’s and investors’ funds, without their consent, before and after the March crypto crash.

Flex Yang, Co-Founder, and CEO of Babel, denied the allegations to Decrypt late Sunday night. He said that “the firm never lost clients’ funds, nor faced any liquidation from lenders.” Yang insisted that Babel maintains a “friendly relationship” with its customers and that its business relationship is dynamic and based on market needs.

The company also said that its investment practices were prudent compared to the rest of the industry, where it claimed that leverage ratios approach 10X. By comparison, Babel says it typically leverages in the 3X range.

Separately, a company spokesman who asked not to be named claimed that the audio appears to have been patched together from unrelated recordings of Del Wang.

“This is edited,” he said. In a subsequent call, however, he noted that  “this audio is too fragmented from too much editing including the background and everything. We can’t tell [whether it’s real.]”

Babel’s business

Yang and Wang, determined not to miss the next “golden era” of Bitcoin, launched Babel in August, 2018. The company now has offices around the world and is registered in Hong Kong. In early March, it closed a Pre-Series A funding round with Dragonfly Capital and Parallel Ventures, and is a portfolio company of NGC, a crypto VC headquartered in Singapore with many partners in China.

Some $750,000 of NGC’s investment, according to the whistleblower, was part of the funds used in the highly leveraged trading.

Babel is considered one of the biggest lenders in crypto and acts as a link between Asia and the west. Reportedly, Genesis Capital, Bitgo, Blockchain.com, Bitcoin.com are among the firm’s better-known clients.

Its business model appears to be no different from most crypto lending firms—it’s essentially a middleman between borrowers and lenders. It claims to have been profitable since day one.

In March—just before Black Thursday—Yang, the company’s co-founder, told Coindesk it had loaned out a record $380 million. One of Babel’s main customers is the mining sector, which borrows money to invest in new rigs and pay for electricity. Babel, in turn, is backed by inter-bank lending from the likes of Genesis and Tether. (Yang told Decrypt last night that roughly $100 million of that amount went to mining-related loans and the rest was to “peer institutions.”)

However, on March 12, when the price of BTC and the rest of the crypto market collapsed, “Scamtosphere,” who is apparently the lead whistleblower and who claims to have inside knowledge of Babel’s workings, alleged that the company was almost wiped out.

Yang said that the claims are flatly untrue: “As a crypto financial institution, we’ve always been carefully monitoring our leverage. We’ve built a solid risk-management system.”

He added: “During 3/12, we were never liquidated nor violated clients agreement.”

In the leaked recording, Del Wang is heard saying that after the crash, Babel reverted to what it termed the “X Plan”—using clients’ funds—to bail itself out.

The “X Plan”

Typically, miners collateralize their BTC with Babel in return for stablecoin or fiat at a  Loan-to-Value (LTV) ratio of 50%-65% with an annualized rate of return between 8% and15%.

How does Babel get these stablecoins? The industry collateralizes clients’ BTC to overseas lenders such as Genesis and Tether, at a more favorable Loan-to-Value (LTV) ratio typically larger than 65% and annualized rate of return between 6%-8%.  Babel’s profit comes from arbitraging the interest rate differences between miners and oversea lenders.

With all the BTC in their wallets, many crypto lending companies engage in market-neutral, low-risk, and “directionless” derivative trading. After all, they need to safeguard clients’ assets, and having reserves in case of a market crash is an essential risk-management practice.

However, the whistleblower claims that Babel took a more risky route.

Del Wang is heard in the leaked tape (the link goes to a somewhat garbled, audio-only YouTube page in Chinese) saying that the company collateralized client and investor assets and engaged in 3-5 times leveraged trading, and mentions $4 million that was used to great effect.

The anonymous whistleblower claimed to Decrypt that Babel made a fortune by staking that $4 million users funds before the crash, into a $20M Bitcoin long position by borrowing again and again from overseas lenders at 80-90% LTV.

Further, the source claimed that $750,000 of that money was venture capital firm NGC’s investment in Babel. An NGC partner who asked not to be identified said he was unaware of any of its investment being used for speculation.

"At the start we were leveraged 3 times. when markets were going up we added more by using the BTC value to borrow more," Del Wang is heard saying in audio reviewed by Decrypt." In fact, when we were in Xinjiang we already levered up more."

"Using what money?" an unidentified person asks.

"Using client savings...We called this the ‘X Plan,’ " replied Del Wang.

There is no indication that Babel lost any of NGC’s money, however; indeed, it’s probable that if true, the risky bet paid off as the company grew to be one of the largest crypto banks in China.

“Good Customer and Bad Customer”  

In all, Babel manages $300 million in assets, $100 million of which is from its clients. The rest is borrowed the whistleblower claimed.

In March, when the market collapsed, overseas lenders initiated margin calls and Babel got caught short, according to the source. The source said that Babel almost went bankrupt because its LTV to lending partners reached 130%, meaning that the market value of BTC was less than the balance that Babel owed to the lending firms.

However sources claimed that Babel was apparently bailed out by Tether, which granted it a loan repayment program: Rather than paying back the money in 48 hours, it got a month. During that time, Babel launched a series of high-yield financing programs such as its Shark Fin products, which promised a 50-60% APY to miners. That product allowed Babel to collect more BTC to pay back to Tether.

A Tether spokesman declined to comment to Decrypt, citing customer confidentiality.

“Destroy the east wall to make up for the west wall (拆了东墙扑西墙) ,” is a saying in Chinese. Babel was supposedly using the financing product to solve its imminent backyard fire with Tether.

Wang is heard jokingly saying in the audio that Babel itself is a bad customer:

Unidentified person:"So if the money is separated, then when we margin call clients and they top-up then they should be fine, right? I recall you said we got a few thousand BTC in margin top-up the other day."

Wang: "That's correct"

Unclear who is speaking: "But we are borrowing ourselves (from outside lenders) also (to speculate). So this time during the market crash we were also in trouble."

Unidentified person: "But if clients top-up margin but we are overleveraged, then clients would still take a loss. And we would default together?"

Wang: "Yes. this is why Silvano [allegedly an employee of Tether, per a source] said they are good customers and we are bad customers. Good customers are our real customers. The bad customer is ourselves [laugh]"

A continuing problem?

Some industry professionals said that Babel’s behavior was excusable, especially its situation during the March crash.

One source who works at a competing firm told Decrypt:

“Babel’s taking a leveraged position during the market crash is understandable. After all, it is a young startup without much institutional backing. However, when the market returned, Babel continued to take leveraged positions. That is the real problem.”

Meanwhile, Babel is evolving its business model.It’s been expanding into other financial services and has launched a private banking service that targets high networth individuals. It claims to have attracted more than $50 million worth of USDT thus far.

One might wonder if Babel’s clients are alarmed by the stories being circulated about the company. On the contrary, some clients are not worried at all. In fact, one customer told Decrypt that they still want to do business with Babel because “if Babel managed to get out of trouble last time, they can probably do it again.”