Troubled Babel Finance Lost Over $280 Million in Customer Funds in Proprietary Trading

Key Takeaways:

  • The firm reportedly lost 8,000 BTC and 56,000 ETH in proprietary trading with customer funds.
  • As per the deck, Babel’s proprietary trading team was “not supported by any term sheets and thus were not recorded in the system.” 
  • Babel Finance suspended client withdrawals in June, citing “unusual liquidity pressures.”

The battered crypto lender Babel Finance reportedly lost 8,000 BTC and 56,000 ETH in proprietary trading with customer funds. In June, the lending platform halted withdrawals and is currently on the brink of bankruptcy.

As per the restructuring proposal deck dated July 2022 accessed by The Block, Babel Finance lost over $280 million in bitcoin and ether owing to its proprietary trading failure. “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,” reads the deck.

According to the deck, the proprietary trading team’s failed operation falls outside of the company’s normal business, which has “otherwise been running smoothly with proper management and control.” The crypto lender describes its proprietary trading business as a “risky” business, yet it failed to hedge its positions.

Reportedly, the Proprietary Trading team operates several Trading Accounts not monitored by Trading Department in which no trading mandate or risk controls were implemented. Mismanagement in the firm’s Proprietary Trading Team was highlighted in the deck when it stated that orders from Babel’s proprietary trading team were “not supported by any term sheets and thus were not recorded in the system.” 

Additionally, Babel’s wallet management team released uncapped amounts of funds to trading accounts run by its proprietary trading team. Babel, which is currently struggling to meet margin calls from counterparties, has now formulated a restructuring plan to save itself from insolvency. The lending firm plans to convert $150 million of the biggest creditors’ debt to convertible bonds.

Further, Babel is also looking toward raising $250 million to $300 million in convertible bonds and then securing a revolving credit of $200 million from creditors “for business restoration.” Founded in 2018, Hong Kong-based Babel Finance said it had an outstanding loan balance of over $3 billion at the end of 2021, with an average monthly trading volume of $800 million in derivatives.

On June 17, it suspended client withdrawals citing “unusual liquidity pressures.” In May, merely days before freezing operations, Babel Finance had hit a $2 billion valuation after raising a series B round.

The embattled firm, which had roughly 500 institutional clients as of May is now witnessing a wave of employee exits following the liquidity crunch. These include global partnership directors Sean Yang, Xavier Xiang, and Yuchen Jiang, among others.

Babel — which is backed by renowned industry names including Sequoia Capital China, Dan Tapiero’s 10T Holdings, Tiger Global Management, Dragonfly Capital, and Circle Ventures, is hoping its financial restructuring plan will prove to be successful and help win back lost investor confidence.

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Saniya Raahath

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