Crypto lender and asset manager Babel Finance is renegotiating its massive $3 billion loan balance. On June 17, the company suspended all redemptions and withdrawals, citing “severe market volatility.” Alarmingly, it’s conducting “an emergency assessment” of creditors’ cash demands.
Babel Finance is prohibiting withdrawals just five days after its competitor, Celsius, similarly froze withdrawals. Catastrophic misallocation of leverage has thinned liquidity across crypto markets, including at Terra LUNA, StableGains, 8BD, Finblox, Voyager, Bancor, Three Arrows Capital (“3AC”), and BlockFi.
Babel claimed to have reached “preliminary agreements on the repayment period of some debts” which has “eased the company’s short-term liquidity pressure.” However, the company has not responded to several journalists’ inquiries about its overall solvency.
Babel Finance used leverage, loved Tether, took big risks
Founded in 2018, Babel Finance offered crypto lending, asset management and prime financing services. At its zenith, the company operated from Hong Kong, Luxemburg, Singapore, and the UK. Importantly, it also structured billions of dollars worth of crypto derivatives, especially options.
Options confer the right to buy or sell at a predetermined price and time. Importantly, the leverage of a typical options contract is usually 10X. That leverage multiplier can increase for over-the-counter and non-standard contracts. Like so many of its competitors in the allegedly transparent DeFi world, Babel does not disclose its notional exposure to the derivatives that it’s structured.
TechCrunch nebulously described Babel Finance as a “comprehensive crypto asset manager for institutional investors.” Specifically, the company attributes its early traction to lending Tether (USDT) to bitcoin miners. In 2020, one of its co-founders described the company as “the bridge between the east miners and west capital.”
Babel Finance traded actively on centralized and decentralized crypto exchanges. For the most part, it dealt in BTC, ETH, USDT, USDC, and derivatives thereof. It claimed to use more conservative leverage than its competitors: 3X versus an industry average approaching 10X, in its estimation though there is no third-party audit that can confirm this claim.
From multi-billion dollar fanfare to ruin within two months
Two months ago, it would have been preposterous to predict the downfall of Babel Finance. On May 25, it raised $80 million at an upsized $2 billion valuation. At the time, the company boasted 500 clients. It had increased its loan balance 33% from February to December. Moreover, it claimed responsibility for $20 billion worth of notional options activity during fiscal 2021.
Funny enough, some of Babel’s competitors are peacocking as potential suitors for distressed crypto lenders. Nexo is offering to buy some of Celsius’ collateral and “is planning a mass consolidation of the crypto industry through mergers and acquisitions.” Exchange giant FTX injected $250 million into BlockFi.
The company’s co-founders are Flex Yang and Del Wang. Investors include Tiger Global Management, Jeneration Capital, 10T Holdings, Dragonfly Capital, Boyu Capital, and BAI Capital.
The Tower of Babel and crypto irony
Ironically, Babel Finance’s corporate slogan is “Seeking Certainty in Uncertainty.” Adding to the irony, it’s named after the eponymous tower “whose top may reach unto heaven” (Genesis 11:4). In this ancient Old Testament story, the Lord was so upset at the Tower of Babel’s builders that he punished them saying he would “confound the language of all the earth: and from thence did the Lord scatter them abroad upon the face of all the Earth.”
Other insolvent crypto projects have named themselves with a wink and a nod to ancient narratives. Beanstalk Finance, a defunct DeFi platform, referenced a children’s story about a giant who fell to his death while climbing to beatific heights. The bankrupt OneRing Finance hearkened to J.R.R. Tolkien’s manifestation of temptation from Lord of the Rings.
The mascot for the multi-billion dollar Wonderland DeFi scandal was the Cheshire Cat who purposefully disoriented Alice in Lewis Carroll’s legend. SiFu’s Vision is a play on Bitcoin Satoshi’s Vision, a failed hard fork of Bitcoin, and CZ’s dubious “Sifu” meme regarding the safety of funds. SafeMoon turned out to be neither safe, nor headed into lunar orbit, rug-pulling its users.