BlockFi Files for US Bankruptcy, Citing FTX Exposure

Cryptocurrency lender BlockFi has filed for Chapter 11 bankruptcy protection, it said Monday, the latest casualty of the industry after the company was hurt by the dramatic collapse of the FTX exchange earlier this month.

The New Jersey filing comes as crypto prices have plummeted. The price of bitcoin, the most popular digital currency to date, has fallen more than 70 percent from its 2021 peak.

“BlockFi’s Chapter 11 reorganization underscores the risk of asset contagion associated with the crypto ecosystem,” said Monsur Hussain, senior director at Fitch Ratings.

New Jersey-based BlockFi, founded by fintech entrepreneur Zac Prince, said in a bankruptcy filing that its heavy exposure to FTX is creating a liquidity crisis. FTX, founded by Sam Bankman-Fried, filed for protection in the United States this month after traders withdrew $6 billion (roughly Rs. 49,020) from the platform in three days and rival exchange Binance left redemption agreement.

“While creditor exposure to FTX is a major driver of this liquidity, creditors have not faced a number of issues that clearly face FTX,” said Mark Renzi, managing director at Berkeley Research Group, the proposed financial advisor. To install BlockFi. “Quite the opposite.”

BlockFi said the liquidity problem was caused by its exposure to FTX through loans from Alameda, a crypto trading company affiliated with FTX, and cryptocurrencies held on the FTX platform that were held there. BlockFi listed its assets and liabilities as between $1 billion (roughly Rs. 8,170 crore) and $10 billion (roughly Rs. 81,700 crore).

BlockFi on Monday also sued holding company Bankman-Fried, seeking to return the shares of Robinhood Markets Inc it pledged as collateral three weeks ago, before BlockFi and FTX filed for bankruptcy protection.

Renzi said BlockFi sold part of its crypto assets in early November to finance its bankruptcy. That sale raised $238.6 million (about Rs. 2,100 crore) in cash, and BlockFi now has $256.5 million (about Rs. 2,100 crore) in cash on hand.

In a statement filed with the court on Monday, BlockFi listed FTX as its second largest lender, and is owed $275 million in loans extended earlier this year. It said it owes more than 100,000 creditors. The company also said in another filing that it plans to lay off two-thirds of its 292 employees.

Under the deal signed with FTX in July BlockFi would get a revolving debt financing of $400 million (Rs. 3,270 crore) while FTX gets an option to buy it for up to $240 million (roughly Rs. 1,960 crore).

BlockFi’s bankruptcy filing comes after two of BlockFi’s biggest rivals, Celsius Network and Voyager Digital, filed for bankruptcy in July, citing extreme market conditions that led to losses for both companies.

Crypto lenders, the banks of the crypto world, have thrived during the crisis, attracting customers who sell double-digit amounts in return for their cryptocurrency deposits.

Crypto lenders are not required to hold cash or liquidity buffers like traditional lenders and some find themselves exposed when collateral shortages force them – and their customers – to face huge losses.

The first bankruptcy hearing for BlockFi is scheduled to take place on Tuesday. FTX did not respond to a request for comment.

list of creditors

BlockFi’s biggest creditor is Ankura Trust, which represents distressed creditors and is owed $729 million (roughly Rs. 5,600 crore). Valar Ventures, a venture capital fund linked to Peter Thiel, has a 19 percent stake in BlockFi equity.

BlockFi has also listed the US Securities and Exchange Commission as one of its biggest creditors, with a claim of $30 million (about Rs. 245 crore). In February, the BlockFi service agreed to pay $100 million (about Rs. 820 crore) to the SEC and 32 states to settle charges related to a crypto-lending product the company offered to about 600,000 investors.

Bain Capital Ventures and Tiger Global led BlockFi partnership in March 2021, BlockFi said in a statement released at the time. Both companies did not immediately respond to a request for comment.

In a blog post, BlockFi said its Chapter 11 filing will enable the company to stabilize its business and increase value for all stakeholders.

“Executing in the best interests of our customers is our top priority and we continue to steer our path forward,” BlockFi said.

In its bankruptcy filing, BlockFi said it has hired Kirkland & Ellis and Haynes & Boone as bankruptcy counsel.

BlockFi has temporarily suspended withdrawals from its platform.

In the filing, Renzi said Blockfi intends to seek the authority to honor customer withdrawal requests from customer wallet accounts, where crypto assets are held in custody. However, the company did not disclose plans for how it would handle withdrawal requests for its other products, including interest-bearing accounts.

“BlockFi customers can end up getting back a large portion of their investment,” Renzi said in the filing.

The origin

BlockFi was founded in 2017 by Prince, currently the company’s CEO, and Flori Marquez. Although headquartered in Jersey City, BlockFi also has offices in New York, Singapore, Poland and Argentina, according to its website.

In July, Prince tweeted that “it’s time to stop putting BlockFi in the same bucket/sentence as Voyager and Celsius.”

Two months ago we looked ‘the same.’ They close and they will lose their customers,” he said.

According to a profile of BlockFi published earlier this year by Inc, Prince grew up in San Antonio, Texas, and financed his college education at the University of Oklahoma and Texas State University with winnings from online poker tournaments. Before starting BlockFi with Marquez, he worked at Orchard Platform, a broker, and at Zibby, a rental lender now called Katapult.

Marquez previously worked at Bond Street, a small business lender that was folded into Goldman Sachs in 2017, according to Inc.

© Thomson Reuters 2022

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