Babel Finance, a financial services firm for cryptocurrencies, recently reported a staggering loss of its customers’ funds totalling over $280 million, according to a report from The Block citing a restructuring deck of the broker.
The firm lost 8,000 BTC and a significant quantity of another token through leveraged positions that it failed to hedge against – a reminder that users can never be fully assured of their bitcoin funds’ safety when entrusting them with a third party.
“In that volatile week of June when BTC fell precipitously from 30k to 20k, unhedged positions in [proprietary trading] accounts chalked up significant losses, directly leading to forced liquidation of multiple Trading Accounts and wiped out ~8,000 BTC and ~56,000 ETH,” the deck reportedly reads.
Proprietary trading techniques, when a financial firm leverages funds held to trade for its own gain, can arguably create conflicts of interest with certain information belonging to particular institutions that customers cannot see. Additionally, in some cases firms may choose to rehypothecate customer funds for their own gain.
“A Proprietary Trading team operates several Trading Accounts not controlled or monitored by Trading Department; no trading mandate or risk controls were implemented for these accounts; no PnL [profit and loss] was reported,” according to the deck, per the report.
Thus, massive losses led to the firms’ capitulation due to a failure of risk management with the use of its customers’ funds.
Now, the company reportedly seeks to convert $150 million of creditor debt into convertible bonds to raise up to an additional $300 million through more convertible bonds, and to receive $200 million in revolving credit. If successful, the largest creditors of Babel will become shareholders.
Indeed, Babel is far from the first firm in the ecosystem to experience a mass liquidation event in recent months. Voyager Digital recently filed for bankruptcy, partially due to Three Arrows Capital (3AC) imploding, a fund to which Voyager was exposed. The contagion in the space also saw FTX exchange save BlockFi and the fall of Celsius Network.
Last month, Babel halted withdrawals on its platform due to the massive losses from the market downturn.