They would reduce rates because they have too many assets under management and not enough demand to lend it out. Before that wasn't a problem when there was a Grayscale premium as they could do the arbitrage there. But now that the premium has disappeared they are forced to rely on lending out that BTC. But if they have too much BTC and not enough demand, then that BTC is just sitting on BlockFi; but they still have to pay interest.
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I agree with everything you wrote in this comment. But I wouldn't call that being "underwater". It is just good business and risk management.
If you have the opportunity to take advantage of huge Grayscale premiums, why wouldn't you. And if that opportunity disappeared because of Canadian ETFs and other investment vehicles, why would you pay excessive interest on the capital you don't need ATM?
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