Nothing like a way to earn digital money for nuthin’ to get the crypto crowd worked up.
Yesterday, the Gemini-backed coin-lending service BlockFi announced the launch of its long-awaited interest account product. The BlockFi Interest Account (BIA) offers consumers up to 6 percent annual interest on bitcoin or ether holdings. The interest is paid out monthly, in crypto, and the amount earned compounds to yield an annual rate of 6.2 percent.
“This is an easy way for crypto investors to earn bitcoin while they HODL,” boasts the coin lender on its website.
The promise to earn while HODLing was at once showered with praise and derided with criticism immediately following the announcement. Anthony Pompliano, co-founder and partner at Morgan Creek Digital, and an investor in BlockFi, was predictably exuberant. And BlockFi’s Twitter account even suggested its product launch accounted for the 3 percent jump in the price of bitcoin, which came minutes after the first story hit the Internet.
Others, however, were far more skeptical of BlockFi’s offering—some even went so far as to chastise the talk of “guaranteed” returns as a “ponzi scheme” and a “scam,” drawing comparisons to the prototypical crypto scam of scams, BitConnect.
If you think crypto lending platforms enable you to become a risk-free creditor & collect interest on any size loan at several hundred basis points above the target federal funds rate in perpetuity, then I have a bridge to sell you.
— Jake Chervinsky (@jchervinsky) March 5, 2019
Harsh words. But completely unjustified, says BlockFi. “Nowhere on our site do we indicate that rates are guaranteed,” says Brad Michelson, BlockFi’s marketing director. “In fact, right on our home page, it says that rates are subject to change.”
Indeed, it seems just about everyone on either side of the hullabaloo forgot to read the fine print. BlockFi’s terms of service specify exactly how interest will be calculated every month, and comes with one gigantic caveat: “We will determine the interest rate for each month in our sole discretion, and you acknowledge that such rate may not be equivalent to benchmark interest rates observed in the market for bank deposit accounts.”
Michelson says the rate each month will be “communicated broadly and transparently,” but it is clearly a variable interest account that is expected to change over time. “Based on what we see in the market now, our guess is it stays at 6% for longer than people expect,” says BlockFi’s marketing director.
Michelson adds that BlockFi’s product differs greatly from that of other coin-lending businesses. “The main difference is that there is no token involved in our model. We don't force users to adopt an unnecessary friction point that makes the process more complex,” he says. “This makes it easier for our customers, because they don't have to worry about owning any extra illiquid tokens or worry about price fluctuations.”
What really makes BlockFi’s offering standout, however, and why it caused such an uproar, is that it’s presently the only product in crypto that promises compound interest on BTC and ETH.
But the interest account doesn’t come without certain risks, which BlockFi duly discloses on its website. The product isn’t a checking or savings account, and it isn’t insured. By signing up and depositing your crypto, you also give BlockFi consent to “lend, sell, pledge, rehypothecate, assign, invest, use, commingle, or otherwise dispose of” your BTC and ETH to counterparties.
Here's a link: https://t.co/bkGRalVOvH. h/t @ObiWanKenoBit for bringing this to our attention. At least they're open about disclosing it, rather than trying to hide it. I wonder how many customers understand the counterparty risk they're taking on--I didn't see disclosure on that https://t.co/k6RE6WLrcS
— Caitlin Long 🔑 (@CaitlinLong_) March 6, 2019
The policy of rehypothecating funds is of particular concern to crypto crusaders like Caitlin Long, an advisor to the Wyoming Blockchain Coalition and former president and chair of Symbion, who helped lobby the Wyoming legislature to outlaw the practice when it comes it crypto lending in the state. Rehypothecation essentially means that your bitcoin can be sold, loaned, or otherwise leveraged in some way multiple times over—with the same asset ending up on a number of different balance sheets.
What you end up with is, theoretically, more bitcoin on paper than there is physically in circulation, artificially inflating the sacred 21 million hard cap on the amount of bitcoin ever to be produced and, in turn, negatively impacting its price.
Still, BlockFi is upfront about its policies and everything is available for prospective customers to read in black and white. “The crypto community is a skeptical bunch, as it should be with some of the issues in the past,” says Michelson. “We look forward to earning the trust of skeptics going forward.”