Crypto service provider Babel Finance loses $280 million in customer funds

Stuggling crypto lender Babel Finance has lost over $280 million of customers’ funds through its proprietary trading desk. The firm, which stopped withdrawals last month, lost 8,000 Bitcoin (BTC) and 56,000 Ether (ETH) last month due to liquidation resulting from the market downturn at the time.

Part of a restructuring deck reportedly reads that in the volatile week of June when BTC fell 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 roughly 280 million dollars. The losses made it impossible for Babel to meet its margin calls from counterparties. The deck blamed the firm’s current struggles on its proprietary trading’s failure.

Trading with customer funds

Additionally, the deck revealed that even though proprietary trading was established to be risky, the team failed to hedge the risk. Not only were they careless with customers’ funds, but the proprietary trading team also operated without transparency. No term sheet supported their buy and sell orders, and there was no record in the system.

"The proprietary trading team operates several trading accounts not controlled or monitored by the trading department; no trading mandate or risk controls were implemented for these accounts; no PnL [profit and loss]was reported." - Babel Finance restructuring plan

Moreso, the firm failed to set a trading cap for the team, and the wallet management team released unlimited funds to the accounts controlled by the trading team. This, however, is not the first time that Babel has been accused of mismanagement of users’ funds. A leaked 2020 recording revealed that the firm leveraged users’ funds to maintain a long position on Bitcoin and was at risk of default during the year.

Babel eyes fundraising

Meanwhile, the lender might still be able to dig itself out of this hole with the restructuring plan of raising about $650 million through equity and debt investments. Most of the plan hinges on creditors, who will become the largest shareholders in the firm if the plan works. Tether has already extended the margin calls deadline for the firm by a month.

A Babel spokesperson said the firm is “working closely with clients, investors and other stakeholders and external advisors during this very difficult time in the industry as we believe that is the best path for a full recovery and value maximization for all the parties.”