Babel Finance loses $280 million invested by its clients. A damning document revealed that the centralized finance platform (CeFi) would have lost the equivalent of 280 million dollars invested by its users. Babel Finance was already in turmoil and is now working on a last-ditch rescue plan. Explanations.
Reckless risk-taking?
Babel Finance is a Hong Kong-based investment platform established in 2018. The company specializes in cryptocurrency lending and borrowing services as well as fund management.
This week, a damning document dated July 20 was leaked. First, we learn that the company was developing a restructuring plan. Following the collapse of Terra USD (UST) and LUNA, as well as due to the bear market, the company had tentatively confirmed suspicions that it would face liquidity problems.
The announcement of the study of a global restructuring plan, therefore, confirms that the time is serious for Babel Finance. In addition, in this document, we learn that 8,000 Bitcoin (BTC) and 56,000 Ethereum (ETH) from the investments of its customers had been lost. The total amount of losses is estimated at $280 million.
On June 17, Babel Finance had, in turn, suspended withdrawals on its platform. The reason that was given then was that of “unusual liquidity pressures”. We now know that the bear market was not solely responsible.
In the document made public this week we can read:
"During that volatile week in June, when BTC fell precipitously from 30,000 to 20,000, unhedged positions in the accounts saw significant losses. This led directly to the forced liquidation of several trading accounts resulting in the loss of 8,000 BTC and 56,000 ETH."
Given the large volume of these losses, the company was unable to meet the margin calls of its counterparties causing the dilution of part of its client's assets.
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Babel Finance dissociates itself from its traders
In the leaked report, Babel Finance denounces the operations undertaken by its traders. The company said:
“The proprietary trading team's failed trade is outside the normal business of the company, which otherwise ran smoothly with proper management and control."
Despite these revelations, the platform still prides itself on adopting robust system-based risk assessment models to “keep assets safe”. In the document, Babel Finance defends that the trading team responsible for this abysmal loss was "neither controlled nor monitored".
She adds that no trading mandate or risk control was put in place during these operations. She adds: “The orders from Babel's proprietary trading team were not backed by any term sheets and were therefore not recorded in the system."
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The company had already gambled, and lost, with client funds
In October 2020, failed transactions carried out by Babel Finance, with the funds of its clients, had already been made public. It was learned at the time that the company had used funds from its users to engage in a risky position in Bitcoin on the eve of the “Black Thursday” crash.
This date is remembered because, on March 12, 2020, BTC experienced one of the most spectacular falls in its history. The cryptocurrency, then valued at 7900 dollars tumbled, in the space of a day, to the level of 3600 USD.
At that time, the company Tether had intervened in order to proceed with the rescue of Babel Finance. To do this, the company allowed Babel to extend its margin calls in order to buy time to strengthen its collaterals.
Towards a new restructuring plan?
If Babel Finance has done well in 2020, we can now wonder if 2022 will not deal it the final blow. Indeed, this year, the company is required to raise hundreds of millions of dollars in order to improve its financial situation and survive.
To do this, Babel Finance intends to convert its debt into shares. This would involve, as a first step, converting $150 million of debt from its biggest creditors into bonds.
In a second step, 250 to 300 million USD would be converted in the same way. Finally, the company would like to obtain a loan amounting to 200 million dollars in order to restore its activity according to its terms.
If this plan is carried out, the current creditors of Babel Finance would then become its shareholders. However, this cannot be done without their confidence in its future and its ability to get out of the turmoil.
Note that the company is currently counting on the support of major players such as Dragonfly Capital, Circle Ventures, and Sequoia Capital.
In addition, Babel Finance emerged victorious from a funding round conducted last May during which 80 million dollars were raised. The company was then valued at $2 billion.
The company has yet to comment on the revelations brought to light by its restructuring proposal. The future of the Hong Kong firm is now in the hands of its creditors unless a generous rescuer takes its destiny into its own hands.
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