$25 Million in 2 Weeks: BlockFi Booms as Bitcoin, Ether Investors Seek Interest

Institutional investors borrow crypto at individualized terms, at interest rates from 4 to 12 percent, and BlockFi can call in the loans at any time.

Wall Street veteran Caitlin Long noted that by depositing their crypto with BlockFi, people expose themselves to a form of counterparty risk: "I didn't see disclosure on that," she wrote, adding that by rehypothecating clients' funds - that is, lending out collateral - BlockFi may be exposing itself to legal challenges in some U.S. states.

BlockFi is currently offering two products to retail customers: cryptocurrency-backed loans and crypto-funded interest accounts.

With the interest account, the customer deposits bitcoin or ether with BlockFi so that the asset can accumulate interest every month.

As mentioned, BlockFi is advertising a 6.2 percent annual compound interest rate for such accounts, which is two to three times better than a U.S.Treasury bond or a U.S. bank saving account yield.

When asked if there is any benchmark BlockFi uses to determine the interest rate, Prince answered simply: "No.".

Gemini Trust, founded by Cameron and Tyler Winklevoss, was chosen to handle custody for BlockFi's clients, as well as the moving of crypto from the depositors to the institutional borrowers - BlockFi itself doesn't hold the cryptographic private keys controlling the funds, Prince said.

The same mechanism works for institutional investors that borrow crypto: if the price of bitcoin goes up, and what they borrowed ends up costing more relative to the amount of cash collateral, BlockFi will contact them and ask them to add more cash.

If the bitcoin price hits a certain preset level, which also varies from borrower to borrower, BlockFi can use the collateral to buy bitcoin and close out the loan.

As for the interest accounts, they are available worldwide, except the states of New York, Connecticut and Washington and in any countries sanctioned by the U.S., the U.K. or the E.U. BlockFi doesn't hold a New York State BitLicense, which explains why it lends but won't take deposits there.