Do you really need a bank? Part 2
Updated: Jun 8
The last time I check the highest USD fix deposit annual interest rate for my bank is around 1.4%. That is with a minimum tenure of 6 months. The money has to stay in the account for the entire tenure. If you withdraw the money, you risk losing out on any interest earned and might even have to pay a penalty.
BlockFi is offering up to 8.6% effective annual interest rate for the same USD that is lying in my bank account. There is no lock up period. Your money can leave anytime with the interest intact and with no penalty. So what's the catch? And who the hell is BlockFi?
BlockFi is another FinTech company backed by Paypal founder Peter Thiel. Other backers include billionaire Mike Novogratz’s Galaxy Digital Ventures, Winklevoss Capital, ConsenSys Ventures and Akuna Capital. It seems well funded. According to Bloomberg article on August 6, 2019, the company debuted its interest earning account in March 2019 and had gathered USD 250 million in assets by August the same year. Their business model is seemingly simple. They make money by taking your money and loan the funds out to other people at a higher interest rate. The difference between them and the bank is that they are not insured by the Federal Deposit Insurance Corp. and funds can be used by the lender for its own purposes.
Since your money is not insured by the FDIC, you could potentially lose all of it without any recourse. That is one scary thought, or is it? The loans are back by digital assets as collateral. The Loan to Value ratio is about 50%. That means you got to have USD100 in digital assets as collateral before the company will loan you USD50. They only take in the digital assets with the most market liquidity such as Bitcoin and Ethereum. So theoretically there is almost no chance of default, as BlockFi would have liquidated the collateral before the LTV ratio is ever breached. Most conventional banks shun digital assets even though it is much more difficult to liquidate a house or a car for the defaulted house mortgage and car loans. Who is doing a riskier business?
I read that BlockFi uses Gemini as their digital assets custodian. Gemini Trust Company, LLC is a New York trust company and Qualified Custodian chartered by the New York State Department of Financial Services under Section 100 of the New York Banking Law. It is SOC 2 Type 1 compliant and is currently undergoing a Type 2 examination. According to its website, it has a USD 200 million insurance coverage for the custodian assets.
I don't know about you. But I gladly ditched my local USD fixed deposit bank account and parked a bulk of my USD and digital assets in this FinTech startup. This is my kind of passive income.