FTX strikes deal with option to buy crypto lender BlockFi

The deal also includes a $400 million credit facility for BlockFi, whose CEO says the company needed to add capital to bolster liquidity

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Cryptocurrency exchange FTX has struck a deal that gives it an option to buy troubled crypto lender BlockFi Inc. for as much as $240 million, BlockFi said Friday, as firms continue to search for stability during a broad industry meltdown.

BlockFi’s agreement with crypto billionaire Sam Bankman -Fried’s crypto exchange also includes a $400 million revolving credit facility. The deal is designed to stabilize BlockFi, a Jersey City, N.J.-based firm founded in 2017, which ran into problems as crypto prices plunged and sparked a liquidity crisis among a number of overleveraged firms.

In this photo illustration, the stock trading graph of FTX Token (FTT) seen on a smartphone screen.  ((Photo by Rafael Henrique / SOPA Images/Sipa USA)No Use Germany. / Reuters Photos)

BlockFi declined to comment. Its chief executive, Zac Prince, said Friday on Twitter the company suffered losses associated with the market meltdown, and determined it needed to add capital to bolster liquidity. Other financing options, he said, requited either haircuts for client funds or putting clients subordinate to lenders in the capital structure. The FTX offer did not require either. “This represents the best path forward,” he said.

FTX declined to comment.

BlockFi said recent events that have caused market volatility in crypto—particularly events related to Celsius Network LLC and crypto-focused hedge fund Three Arrows Capital Ltd.—led to this deal. The Wall Street Journal reported last week that Mr. Bankman-Fried was in talks to acquire a stake in BlockFi. His other company, Alameda Research, recently acquired a substantial stake in crypto broker Voyager Digital Ltd.

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On Friday, Voyager announced that it was temporarily freezing withdrawals. In late June it limited withdrawals to $10,000 a day.

The cryptocurrency industry has been in crisis mode as the price of digital money has sold off sharply. Bitcoin has declined about 72% from its high of $67,802 in November, and the entire crypto market has lost more than $2 trillion in value.

The announcements Friday are the latest example of just how badly the crypto selloff has battered companies within the sector. BlockFi, which has raised about $1.2 billion in venture funding, was valued close to $5 billion at its peak last year. Voyager Digital has seen its stock price fall 96%, from about $25 in November to 58 cents on Thursday.

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The selloff put a severe strain on those companies and others, especially ones that were highly leveraged, including Celsius and Three Arrows. Other market players, like Coinbase Global Inc., have seen their revenue drop sharply, and many companies in the space, including both Coinbase and BlockFi, have resorted to layoffs. A number of observers in the market expect a wave of consolidation as weaker companies run out of capital.

Chief Executive Officer of FTX Trading Limited Sam Bankman-Fried  (Photo by Jabin Botsford/The Washington Post via Getty Images / Getty Images)

BlockFi had revenue in 2021 of about $475 million, according to research firm PitchBook. It isn’t known whether or how profitable the private company has been. The company said it was cash-flow positive in May 2022.

In February, BlockFi paid a $100 million fine to the Securities and Exchange Commission to settle claims it allowed nearly 600,000 users to earn interest by lending their holdings to other traders in violation of investor-protection laws.

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More recently, BlockFi said it experienced about $80 million in losses in connection with its overcollateralized loan to Three Arrows. The hedge fund suffered heavy losses following a broad market selloff in digital assets.

BlockFi logo on mobile phone (BlockFi)

The announcement said FTX could pay up to $240 million to acquire BlockFi, based on “performance triggers” that were not detailed. Mr. Prince did, however, push back against some reports that the company would be sold at a very low price. “I can 100% confirm that we aren’t being sold for $25M,” he wrote on Twitter.

The agreements are subject to shareholder approval, BlockFi said.

Write to Paul Vigna at paul.vigna@wsj.com and Denny Jacob at denny.jacob@wsj.com