Babel lost over $280M trading with customer funds; wants to raise up to $300M

Embattled crypto lender Babel Finance lost over $280 million while trading with customer funds, The Block reported July 29, citing the firm’s restructuring proposal deck.

The report said that Babel Finance lost around 8,000 Bitcoin (BTC) and 56,000 Ethereum (ETH) in June when it faced forced liquidation of its positions due to the market downturn.

The deck read:

“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.”

Owing to these losses, Babel’s lending and trading departments could not meet margin calls from counterparties, the report said. The firm’s woes can be attributed to the Proprietary Trading team’s failure, the deck said.

The deck further revealed that Babel Finance’s proprietary trading team had free reign and failed to hedge risk. The team handled multiple trading accounts that were not controlled or monitored by the firm’s trading department, the deck showed. Additionally, the proprietary trading team had no trading mandates or safeguards against risks and did not report any profit or loss.

The proprietary trading team also operated in the dark, such that their buy and sell orders were “not supported by any term sheets and thus were not recorded in [the] system,” as per the deck. Moreover, there was no trading cap for the team and Babel’s wallet management team “released uncapped amount of funds” to the trading accounts controlled by the team, the report said.

A Babel Finance spokesperson told The Block that 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.”

Babel Finance has been accused of inappropriately using user funds before. In October 2020, leaked recordings suggested that Babel leveraged customer funds to boost a long position on Bitcoin and was at risk of default during the Black Thursday market crash in March of the year.

At the time, Tether had reportedly rescued the lender by extending its margin call deadlines by a month.

Babel’s plan of action

Babel aims to raise hundreds of millions of dollars in debt and equity investments as part of its plan to save itself.

According to the deck, the lender wants to convert $150 million of its debt from the biggest creditors to convertible bonds. Babel is also looking to raise $250 to $300 million in convertible bonds and secure a revolving credit line of $200 million from creditors, the report said. This means that if the plan is executed, Babel’s biggest creditors will turn into shareholders.

Babel, which halted the withdrawal of customer funds last month, raised $80 million in a Series B funding round in late May, days before its financial troubles started. At the time, the firm was valued at $2 billion. Babel also raised $40 million in May 2021.

Babel Finance is backed by marquee investors, including Circle Ventures, the venture capital arm of USDCoin issuer Circle, Sequoia Capital China, Tiger Global Management, and Dragonfly Capital, among others.