BlockFi is a cryptocurrency management platform that enables investors to leverage their cryptocurrency assets. BlockFi seeks to merge aspects of traditional financial institutions with the cryptocurrency ecosystem. These services allow investors to earn interest on their cryptocurrency while enjoying the security benefits that come with using a more traditional financial management platform. The platform allows cryptocurrencies to be exchanged but also allows for features more frequently found at banks, such as earning interest and obtaining loans.
BlockFi provides financial services to small investors and to corporations. With no minimum account balance, BlockFi strives to be accessible to individual investors. Additionally, once an investor moves their cryptocurrency over to the platform, they can buy and sell their cryptocurrency without fees.
What is Tether (USDT)?
Tether (USDT) is a stablecoin pegged to the value of the U.S. dollar. USDT serves to bridge the cryptocurrency space with fiat currency. Additionally, because USDT is held at a constant price of $1, it serves as a store of value in the cryptocurrency space for those who wish to interact with the cryptocurrency ecosystem but not be exposed to volatility or make speculative investments.
What Is BlockFi?
BlockFi was founded in 2017 by Zac Prince and Flori Marquez with the intent to provide credit services to cryptocurrency markets. Prince and Marquez believed that there was untapped demand for banking services in the cryptocurrency space, as these services could be more rewarding for investors due to the volatility of cryptocurrency. BlockFi outperforms the competition by offering generous interest rates without compromising on the security of its customers’ digital assets.
As the cryptocurrency market continues to grow, with total market capitalization exceeding $2 trillion dollars this year, BlockFi continues to see a strong demand for its services. BlockFi has released that its assets now total over $10 billion and that it is serving more than 450,000 clients. This huge boom in popularity has sparked questions from regulators about how to control an institution that bridges the cryptocurrency and banking sectors.
Cryptocurrency Interest and Regulation
Government agencies, such as the Federal Reserve, have been struggling to keep pace with the rapidly evolving cryptocurrency space. Decentralized finance (DeFi) has presented a complex new problem for regulators who fear that investors could become susceptible to fraud and security breaches. BlockFi has been accused of breaking local securities laws in several states because of the interest options it allows investors to access. These cases argue that the BlockFi Interest Account (BIA) should be regulated like a product. The outcome of these cases remains unclear as the regulatory framework for cryptocurrency is still evolving
BlockFi provides similar services as most legacy financial institutions, but it should be noted that it lacks consumer protections commonly associated with bank accounts. Cryptocurrency, a form of digital currency, is innately volatile and thus possesses a risk that prices could fluctuate wildly. Unlike fiat money in a bank, digital currency is not legal tender and is not backed by any government. Two types of governmental protection exist for bank- or brokerage-held consumer funds: the Federal Deposit Insurance Corporation (FDIC) protects against loss of your insured deposits if the bank fails; the Securities Investor Protection Corporation (SIPC) protects against the loss of cash and securities held at a financially-troubled brokerage firm but not against the decline in value of your securities. Funds at BlockFi don’t fall under FDIC or SIPC protection.
These concerns about regulation and consumer suitability stem from a failure of the regulatory bodies and outdated laws, not from the actions of BlockFi itself. In fact, BlockFi is the only lender that has widespread support from major financial corporations such as Susquehanna International Group, Fidelity Investments, and Coinbase Ventures (NASDAQ: COIN). Additionally, BlockFi’s main digital asset custodian is regulated by the State of New York. Security remains a top priority at BlockFi, and the regulatory challenges may serve to better the cryptocurrency space as a whole.
How Does Earning Interest on Crypto Work?
The BIA allows investors to earn interest on their cryptocurrency holdings. BlockFi pays out a compounded monthly interest when you store your cryptocurrency with it. Once you fund your account, interest begins accruing the next business day, and payments go out at the end of the month.
BlockFi charges interest on its loans to consumers, which allows it to provide interest to investors. When cryptocurrency is deposited into BlockFi, the currency goes to one of its custodians (such as Gemini). Once the cryptocurrency is in the hands of these secure custodians, BlockFi lends the cryptocurrency to financial institutions, who use those assets to make gains via arbitrage transactions.
In short, BlockFi, while a centralized company itself, uses DeFi tools to generate interest for those who provide it with cryptocurrency. These interest-generating accounts come with the risk that interest is not be guaranteed.
Risks of Earning Interest on Crypto
As discussed above cryptocurrency is not recognized as legal tender in the U.S. A BIA is not a bank account or a brokerage account and is not subject to FDIC, SIPC, or other similar protections. It is not a risk-free product, and, unlike money in a bank account or Certificate of Deposit, loss of principal is possible. If cryptocurrency prices fall or a security breach occurs, profits made from earning interest could be wiped out. Therefore, don’t invest more in stable coin interest accounts than you can afford to lose.
Is Earning Interest on Cryptocurrency Worth It?
Cryptocurrency offers an extremely high rate of return compared to traditional savings accounts. Return of 4% to 8% on cryptocurrency interest accounts with BlockFi massively trump the 0.3% to 0.6% rates provided by banks for fiat currencies. BlockFi has no minimal lockup period, so funds can be withdrawn as you need them. Earning interest on your cryptocurrency can be a great way to acquire more of it, especially if you believe that the cryptocurrency space will continue to grow and that tokens will continue to increase in price.
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