Struggling crypto lender Babel Finance lost over $280 million trading with client funds, The Block reported July 29, citing the company’s restructuring proposal file.
The report states that Babel Finance lost around 8,000 Bitcoin (BTC) and 56,000 Ethereum (ETH) in June when it faced the forced liquidation of its positions due to the market downturn.
The bridge said:
“During that volatile week in June, when BTC fell precipitously from 30,000 to 20,000, unhedged positions in [proprietary trading] accounts experienced significant losses, directly leading to the forced liquidation of several trading accounts and wiping out ~8,000 BTC and ~56,000 ETH.
Due to these losses, Babel’s lending and trading departments were unable to meet counterparty margin calls, according to the report. The company’s woes can be traced to the failure of the Proprietary Trading team, the bridge said.
The game further revealed that Babel Finance’s proprietary trading team had carte blanche and failed to hedge the risks. The team managed multiple trading accounts that were not controlled or monitored by the company’s trading department, the bridge showed. Additionally, the proprietary trading team had no trading mandate or risk protection and reported no profit or loss.
The proprietary trading team also operated in the dark, so their buy and sell orders were “not backed by term sheets and therefore not recorded in [the] system,” according to the bridge. Additionally, there was no trading cap for the team and Babel’s portfolio management team “released an uncapped amount of funds” to trading accounts controlled by the team, according to the report.
A Babel Finance spokesperson told The Block that the company is —
“to work closely with customers, investors and other external stakeholders and advisors during this very difficult time in the industry, as we believe this is the best path for a full recovery and maximization of value for all parties.”
Babel Finance has previously been accused of improperly using user funds. In October 2020, leaked records suggested that Babel leveraged client funds to bolster a long position in Bitcoin and was in danger of defaulting during the Black Thursday stock market crash in March of the year.
Back then, Tether had would have rescued the lender by extending its margin call deadlines by one month.
Babel’s Action Plan
Babel aims to raise hundreds of millions of dollars in debt and equity as part of its plan to save itself.
According to the bridge, the lender wants to convert $150 million of its debt from the biggest creditors into convertible bonds. Babel is also looking to raise $250 million to $300 million in convertible bonds and secure a $200 million revolving line of credit from creditors, according to the report. This means that if the plan is executed, Babel’s biggest creditors will turn into shareholders.
Babel, which halted withdrawal of client funds last month, raised $80 million in a Series B funding round in late May, days before its financial troubles began. At the time, the company was valued at $2 billion. Babel also raised $40 million in May 2021.
Babel Finance is backed by well-known investors including Circle Ventures, the venture capital arm of USDCoin issuer Circle, Sequoia Capital China, Tiger Global Management, and Dragonfly Capital, among others.