BlockFi, the cryptocurrency lending service backed by Galaxy Digital, Winklevoss Capital, ConsenSys Ventures and others, is expanding into trading with an unusual, zero-fee model.

The startup has made a name for itself by offering investors a way to realize a return on their crypto without selling it. Clients deposit bitcoin, ether or the GUSD stablecoin with BlockFi, then take out U.S. dollar loans against their crypto collateral or earn interest on their deposits. BlockFi lends the crypto to big institutional players that use it for trading and pay interest, which the lender passes back to depositors.

Starting Thursday, users have one more option: they can buy or sell using their balances – for example, buy more bitcoin using the GUSD or ether they've deposited or vice versa.

There will be no trading fees, as the service will have a different profit model: the money will be coming from selling data on the users’ trades to big institutional crypto firms that, in turn, will act as market makers at BlockFi, providing liquidity.

“Market makers want the information about what trades are happening, and they get it by having relationships with as many venues as they can support to receive that order flow,” BlockFi CEO Zac Prince said. The data will be anonymized when the service is up and running, the company said.

Some of these market makers have been BlockFi’s clients on the crypto lending side already, and some of them are also the startup’s equity investors, like Susquehanna, Akuna Capital and CMT Digital, Prince said. The fact that the institutions will be doing multiple activities on BlockFi will help build strategic relationships with them, he said.

BlockFi decided to expand into the exchange business after a customer survey found users tended to withdraw their crypto for trading purposes, Prince said.

“We ask a subset of clients ‘why are you withdrawing?’ when they do withdraw and the most common answer has been ‘to trade’,” Prince said. “Our existing user base wanted to trade and requested that we build a product for trading on our platform.”

BlockFi's crypto trading interface

Fiat on-ramp

BlockFi will also add more options for interest-earning accounts and trading: starting early 2020 users will be able to deposit and buy USDC and litecoin. (The original date given by BlockFi was Dec. 11, but after this story was published the company contacted CoinDesk to say it was pushed back.)

The company would not disclose exact numbers, but, according to Prince, “tens of thousands” of people are now keeping their crypto with BlockFi, and more than 50 institutional players are borrowing from it. But that’s not enough for this venture capital-funded outfit: in addition to experienced crypto holders, BlockFi wants to attract first-time buyers, too.

For this category, BlockFi is planning to open fiat-to-crypto trading, Prince said. The fiat gateway is expected to go live sometime during the first quarter of 2020. BlockFi has been ramping up its compliance work: the company recently secured a money services business (MSB) registration with the U.S. Financial Crimes Enforcement Network (FinCEN).

It’s also working on getting money transmission licenses in a bunch of states — Prince wouldn’t disclose which ones but said BlockFi is “pretty close" to getting a license in some of them.

And its ambitions go further: in the second half of 2020, BlockFi is planning to launch a crypto rewards credit card.

“Up until now, we’ve been focused on building products for existing crypto investors so they could get the same type of services as in traditional finance. In 2020, we’re going to launch products that will enable us to add new consumers to the crypto ecosystem,” Prince said.

Changing rates

When the clients buy crypto on BlockFi it will automatically go into their interest accounts and start earning interest if a client chooses this option, Prince said. BlockFi launched the interest-earning accounts in March, offering up to 6.2 percent in compound interest on bitcoin and ether deposits.

BlockFi has changed the terms for the interest accounts several times: in April, the rates were cut for accounts larger than 25 bitcoin or 500 ether; in May, the threshold for lower rates dropped further to 250 ETH and later on, to 5 BTC and 200 ETH.

Last week, the terms changed again: now the 6.2 percent rate will be applicable to holdings lower than 10 BTC, while everything a user have above this will earn only 2.2 percent annually. For ether, deposits below 1,000 ETH will be earning 4.1 percent annually, and everything above only 0.5 percent. The rate for any amount of GUSD is now 8.6 percent.

Prince explained that the changes in the terms had to do with the balance between retail clients who are keeping their crypto at BlockFi and institutional clients that are borrowing crypto for trading.

“Initially, we were positively surprised how much we received on the side of deposits and we had to give the institutions time to catch up,” Prince said. Now, “we’ve never been so balanced, and it’s growing every day,” he added.

As for the latest change, “we raised the tiers because we were seeing an uptick in demand and wanted to raise more supply, plus, pass on more of the value to our clients,” Prince said.

Staff doubles

Initially backed by ConsenSys Ventures, SoFi, Kenetic Capital and Galaxy Digital, BlockFi brought in more investors in an August Series A round, including Peter Thiel’s Valar Ventures, Winklevoss Capital, Morgan Creek Digital and Akuna Capital.

The recent $18.4 million funding helped to substantially grow the team: compared to about 30 people that had been working at BlockFi this summer, the company now has over 60 people, half of them engineers, Prince said.

There has been some finance talent acquisition, too: in October, the company hired Jessica Raybeck, a former vice president at Nomura and Citi, as the head of institutional client relationship management.

UPDATE (Dec. 5, 17:00 UTC): This article has been updated to note that the trading data BlockFi sells to market makers will be anonymized.

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