Bitcoin Magazine head of market research Dylan LeClair reacts to BlockFi’s bankruptcy filing in Making Money.
Fears of contagion continue to mount in cryptocurrency markets after BlockFi filed for bankruptcy on Monday due to the company’s financial ties to failed cryptocurrency exchange FTX.
Now he says he owes more than 100,000 creditors between $1 billion and $10 billion. Eight of its affiliated firms are in Chapter 11 bankruptcy proceedings.
BlockFi, a lending platform in the crypto space, has allowed individuals to use cryptocurrencies as collateral for US dollar loans. It finally peaked at around $3 billion in early 2021.
CRYPTOLENDER BLOCKFI BANKRUPT FTX
When cryptocurrency assets took a nosedive over the past year, falling prices meant the value of the collateral was less than the value of many of BlockFi’s outstanding loans. This led to it facing liquidity problems and entering into a loan agreement with Sam Bankman-Fried’s FTX in July as part of efforts to strengthen its books.
Bitcoin, for example, has fallen more than 71% to $16,000 in the past 12 months.
Credit card from BlockFi app and BlockFi website (BlockFi website)
The deal included a $400 million credit facility for BlockFi and also gave FTX the option to buy BlockFi for up to $240 million. FTX has played a similar role for dozens of firms through acquisitions and investments, and the deal gave BlockFi a critical lifeline. BlockFi also made loans to FTX’s sister company, a hedge fund known as Alameda Research.
BLOCKFI IS NOT FTX, COMPANY’S FINANCIAL ADVISOR SAYS
After FTX imploded and Bankman-Fried resigned as his former company entered bankruptcy proceedings, BlockFi’s relationship with FTX soured its finances.
Against the background of the collapse and bankruptcy of FTX, BlockFi was “trapped” and could not access credit facilities. It was later forced to stop withdrawing funds from its platform and asked customers not to deposit into their digital wallets or accounts.
FTX Group has appointed new independent directors to oversee its collapsed crypto empire, saying its bankruptcy could involve more than a million creditors. (Angel Garcia/Bloomberg via Getty Images/Getty Images)
One of those creditors is the federal government. In February, BlockFi agreed to pay a total of $100 million in fines to the Securities and Exchange Commission (SEC) for failing to register offers and sales of its retail cryptocurrency loan product. The company still owes the SEC $30 million as it enters bankruptcy proceedings.
MARK CUBAN ON CRYPTO AMONG FTX PARTY: ‘STOP THE SIGNAL’
The bankruptcy process is meant to give the company the stability it needs to restructure, and BlockFi says it has $256.9 million in cash on hand, which could provide enough liquidity to support some of its operations during the restructuring.
It is not yet clear what effect the collapse of FTX and Alameda Research will have on BlockFi’s bankruptcy proceedings and vice versa. BlockFi owes $275 million to FTX, and Alameda Research owes $680 million to BlockFi for a pre-bankruptcy loan.
Sam Bankman-Fried (Lam Yik/Bloomberg via Getty Images/File/Getty Images)
While BlockFi’s exposure to FTX drove it into bankruptcy, it may not have demonstrated the same failures of corporate control that FTX did.
In BlockFi’s bankruptcy filings, the company’s financial advisor said, “To date, I have not found any failures in corporate controls or system integrity, and I have found BlockFi’s financials to be reliable.” This statement is in stark contrast to the situation at FTX, where the company’s new CEO cited “extensive failures” of corporate controls in the bankruptcy filings and said there was a “total lack of reliable financial information.”
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Late Monday, BlockFi filed a lawsuit in New Jersey bankruptcy court against a holding company owned by Sam Bankman-Fried, who is not named as a defendant in the suit.
BlockFi’s lawsuit alleges that Emergent Fidelity Technologies Ltd. The holding company known as Robinhood Markets Inc. has defaulted on its obligations to pay Alameda Research’s debts as collateral. The deal was made three weeks before FTX and BlockFi filed for bankruptcy. Emergent owns 7.42% of Robinhood, according to Eikon data.
At Tuesday’s bankruptcy court hearing, BlockFi’s attorney said the company intends to allow customers to withdraw money from its digital wallets in the near future, and that those funds are not property of the company’s assets.
Fox Business’ Ernie Sadashige and Reuters contributed to this report.