Crypto Banking Wars: Can BlockFi & Celsius Disrupt Banking?

These crypto lending & borrowing services found early traction. Are they capable of bundling more financial services and winning the broader consumer finance market?

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Hightop

11 min readAug 19, 2020

This is the third part of Crypto Banking Wars — a new series that examines what crypto-native company is most likely to become the bank of the future. Who is best positioned to reach mainstream adoption in consumer finance?

While crypto allows the world to get rid of banks, a bank will still very much be necessary for this very powerful technology to reach the masses. As we laid out in our previous series, Crypto-Powered, we believe a crypto-native company will ultimately become the bank of the future. We’re confident Genesis Block will have a seat at that table, but we aren’t the only game in town.

In the first post of this series, we did an analysis of big crypto exchanges like Coinbase & Binance. In our second episode, we looked at the world of non-custodial wallets.

Today we’re analyzing crypto lending & borrowing services. The Earn and Borrow use-case covers a lot of what traditional banks deliver today. This category of companies is a threat worth analyzing. As we look at this market, we’ll mostly be focused on custodial, centralized products like BlockFi, Nexo, and Celsius.

Many of these companies found early traction among crypto users. Are they capable of bundling more financial services and winning the broader consumer finance market? Let’s find out.

Institutional Borrowers

Before we start talking about companies let’s just give an overview and some context. Because speculation and trading remains one of the most popular use-cases of crypto, a new crypto sub-industry around credit has emerged. Much of the borrowing demand has been driven by institutional needs.

For example, a Bitcoin mining company might need to borrow cash to pay for operational costs (salaries, electricity). Or a crypto company one that did an ICO that’s crypto-rich might need to borrow cash to pay for engineering salaries. Or a crypto hedge fund needs to borrow for leverage or to take a specific market position. While all of these companies have sufficient crypto to cover the costs, they might not want to sell it — either for tax or speculative reasons (they may believe these crypto assets will appreciate, as with most in the industry).

Instead of selling their crypto, these companies can use their crypto as collateral for loans. For example, they can provide $150k in Bitcoin as collateral, and borrow $100k. Given the collateralization happening, the underwriting process becomes straightforward. Companies all around the world can participate — language and cultural barriers are removed.

The leader (and one of our partners) in this space is Genesis Capital. While they are always the counterparty for both lenders and borrowers, they are effectively a broker. They are at the center of the institutional crypto lending & borrowing markets. Their total active loans as of March 2020 was $649M. That number shot up to $1.42B in active loans as of June 2020. The growth of this entire market segment is impressive and it’s what is driving this opportunity for consumers downstream.

Consumer Products

While most of the borrowing demand comes from institutional players, there is a growing desire from consumers to participate on the lend/supply side of the market. Crypto consumers would love to be able to deposit their assets with a service and watch it grow. Why let crypto assets sit on an exchange or in cold storage when it can be earning interest?

A number of consumer-facing products have emerged in the last few years to make this happen. While they also allow users to borrow (always with collateral), most of the consumer attraction is around growing their crypto, even while they sleep. Earning interest. These products usually partner with institutional players like Genesis Capital to match the deposits with borrowing demand. And it’s exactly part of our strategy as well at Genesis Block beyond what we’re doing with DeFi (decentralized finance).

A few of the most popular consumer services in this category include BlockFi, Nexo, and Celsius.

BlockFi

BlockFi (Crunchbase) is the leader in this category (at least in the West). They are well-capitalized. In August 2019, they raised $18.3M in their Series A. In Feb 2020, they raised $30M in their Series B. In that same time period, they went from $250M in assets under management to $650M. In a recent blog post, they announced that they saw a 100% revenue increase in Q2 and that they were on track to do $50M in revenue this year. Their growth is impressive.

BlockFi did not do an ICO, unlike Celsius, Nexo, Salt, and Cred. BlockFi has a lot of institutional backing so it is perceived as the most reputable in the space. BlockFi started with borrowing — allowing users to leverage their crypto as collateral and taking out a loan against it. They later got into Earning — allowing users to deposit assets and earn interest on it. They recently expanded their service to “exchange” functionality and say they are coming out with a credit card later this year.

Security Woes

It’s incredible that BlockFi has been able to see such strong growth despite their numerous product and security woes. A few months ago, their systems were compromised. A hacker was able to access confidential account information, such as names, dates of birth, postal addresses, activity history, and balances. While no funds were stolen, this was a massive embarrassment and caused a lot of reputational damage.

In a separate incident earlier this year, a user discovered a major bug that allowed him to send the same funds to himself over and over again, ultimately accumulating more than a million dollars in his BlockFi account. BlockFi fortunately caught him just before withdrawal.

Poor Product Execution

Beyond their poor security — which they are now trying to get serious about — their products are notoriously buggy and hard-to-use. I borrowed from them a while ago and used their interest-earning account product until very recently. I have first-hand experience of how painful it is. But don’t take my word for it… here are just a few recent tweets from their own customers.

Users seem to agree that BlockFi is buggy and the user experience is poor.

It’s just really hard to trust a financial product that is this buggy. For a while, their interest-earning product had a completely different authentication system than their loan product (users had two sets of usernames/passwords). Many people have had issues with withdrawals. The app is constantly logging people out, blank screens, ugly error messages. Emails with verification codes are sometimes delayed by hours (or days). I do wonder if their entire app has been outsourced. The sloppiness shines through.

Not only is their product buggy and UX confusing, but their branding is weak. To the left is a t-shirt they once sent me. While I appreciate the gift, it looks like they just found a bunch of quirky fonts, added their name, and slapped it on a t-shirt.

Culture

To the innocent bystander, many of these issues seem totally fixable. They could hire an amazing design agency to completely revamp their brand. They could hire a rock-star group of engineering consultants to fix their bugs. While it could stop the bleeding for a time, it may not solve the underlying issues. Years of sloppy product execution represents something much more destructive. It represents a top-down mentality that shipping anything other than excellence is okay. That product experience doesn’t matter. That design doesn’t matter. That craftsmanship, strong execution, precision doesn’t matter. That’s very different from our culture at Genesis Block. And I shared some thoughts in a blog post a few weeks ago.

This cancerous mentality that I think permeates the BlockFi culture rarely stays contained within product & engineering — this leaks to all parts of the organization. No design agency or consulting firm will fix some of the pernicious values of a company’s soul. These are deeper issues that only leadership can course-correct.

If BlockFi’s sloppiness were due to constant experimentation, iteration, shipping, or some “move fast and break things” hacker culture… like Binance… I would probably cut them more slack. But there is zero evidence of that. “Move fast and break things” is always scary when dealing with financial products. But in BlockFi’s case, when it’s more like “move slow and break things,” they are really playing with fire. Next time a massive security breach occurs, like what happened earlier this year, they may not be so lucky.

Institutional Focus

Based on who is on their team, their poor product execution shouldn’t be a surprise. Their team comes mostly from Wall Street, not the blockchain community (where our roots are). Most of BlockFi’s blockchain/crypto integration is very superficial. They take crypto assets as deposits, but they aren’t leveraging any of the exciting, low-level DeFi protocols like we are.

While their Wall Street heritage isn’t doing them any favors on the product/tech side, it’s served them very well on winning institutional clients. This is perhaps their greatest strength. BlockFi has a strong institutional business. They recently brought on Three Arrows Capital as a strategic investor — a crypto hedge fund who does a lot of borrowing. In that announcement, BlockFi’s founder said that bringing them on “aligns well with our focus on international expansion of our institutional services offering.” They also recently brought someone on who will lead business development in Asia among institutional clients.

BlockFi Wrap Up

So is BlockFi a competitor to Genesis Block? There are certainly features that overlap with our offering. And it’s possible that they are angling to become the bank of the future like we are. However, they simply have not proven they are capable of designing, building, and launching world-class consumer products. They’ve had issue after issue around their security and their poor product execution. Their company/founder twitter accounts seem to only tweet about Bitcoin. I don’t think they understand, appreciate, or value the power of DeFi. It’s unlikely they’ll be leveraging it any time soon. All of these reasons are why I don’t see them as a serious threat to Genesis Block.

However, because of their strong institutional offering, I hope that Genesis Block will ultimately have a very collaborative and productive partnership with them. Assuming they figure out their security woes, we could park some of our funds with BlockFi (just as we will with Genesis Capital and others). I think what’s likely to happen is that we’ll corner the consumer market and we’ll work closely with BlockFi on the institutional side.

I’ve been hard on BlockFi because I care. I think they have a great opportunity at helping elevate the entire industry in a positive way. But they have a lot of issues they need to work through. I really don’t want to see users lose millions of dollars in a security breach. It could set back the entire industry. But if they do things well… a rising tide lifts all boats.

Honorable Mentions

Celsius (ICO Drops) raised $50M in an ICO, and is led by serial entrepreneur Alex Mashinsky. I’ve met him, he’s a nice guy. Similar to Binance, their biggest Achilles heel could be their own token. There are also a lot of unanswered questions about where their deposits go. They don’t have a record of great transparency. They recently did a public crowdraise which is a little odd given their large ICO as well as their supposed $1B in deposits. Are they running out of money, as some suggest? Unclear. One of their biggest blindspots right now is that Mashinsky does not understand the power of DeFi. He is frequently openly criticizing it.

Nexo (ICO Drops) is another similar service. They are European-based, trying to launch their own card (though they’ve been saying this forever and they still haven’t shipped it), and have a history in the payments/fintech space. Because they haven’t penetrated the US — which is a much harder regulatory nut to crack — they are unlikely to be as competitive as BlockFi. There were also allegations that Nexo was spreading FUD about Chainlink while simultaneously partnering with them. Did Nexo take out a short position and start spreading rumors? I don’t know. Never a dull moment in crypto.

Other players in the lending & borrowing space include Unchained Capital, Cred (ICO Drops), and Salt (ICO Drops).

Wrap Up

While many companies in this category seem to be slowly adding more financial services, I don’t believe any of them are focused on the broader consumer market like we are. To use services like BlockFi, Nexo, or Celsius, users need to be onboarded and educated on how crypto works. At Genesis Block, we don’t believe that’s the winning approach. We think blockchain complexity should be abstracted away from the end-user. We did an entire series about this, Spreading Crypto.

For many of these services, there is additional friction due to ICO tokens that are forcefully integrated into the product (see NEXO token or CEL Token). None of these services have true banking functionality or integration with traditional finance —for example, easy offramp or spending methods like debit cards. None of them are taking DeFi seriously — they are leveraging crypto for only the asset class, not the underlying technology around financial protocols.

So are these companies potential competitors to Genesis Block? For the crypto crowd, yes. For the mass market, no. None of these companies are capable of reaching the billions of people around the world that we hope to reach at Genesis Block.