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Business

Crypto lender BlockFi files for bankruptcy, cites FTX exposure

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  • Filing follows weeks after FTX collapse
  • FTX listed as BlockFi’s No.2 creditor
  • Bitcoin down over 70% from 2021 peak

Nov 28 (Reuters) – Cryptocurrency lender BlockFi has filed for Chapter 11 bankruptcy protection, it said on Monday, the latest crypto casualty after the firm was hurt by exposure to the spectacular collapse of the FTX exchange earlier this month.

The filing in a New Jersey court comes as crypto prices have plummeted. The price of bitcoin , the most popular digital currency by far, is down more than 70% from a 2021 peak.

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

New Jersey-based BlockFi, founded by fintech executive-turned-crypto entrepreneur Zac Prince, said in a bankruptcy filing that its substantial exposure to FTX created a liquidity crisis. FTX, founded by Sam Bankman-Fried, filed for protection in the United States earlier in November after traders pulled $6 billion from the platform in three days and rival exchange Binance abandoned a rescue deal.

“Although the debtors’ exposure to FTX is a major cause of this bankruptcy filing, the debtors do not face the myriad issues apparently facing FTX,” said the first day bankruptcty filing by Mark Renzi, managing director at Berkeley Research Group, the proposed financial advisor for BlockFi. “Quite the opposite.”

BlockFi said the liquidity crisis was due to its exposure to FTX via loans to Alameda, a crypto trading firm affiliated with FTX, as well as cryptocurrencies held on FTX’s platform that became trapped there. BlockFi listed its assets and liabilities as being between $1 billion and $10 billion.

Renzi said that BlockFi had sold a portion of its crypto assets earlier in November to fund its bankruptcy. Those sales raised $238.6 million in cash, and BlockFi now has $256.5 million in cash on hand.

In a court filing on Monday, BlockFi listed FTX as its second-largest creditor, with $275 million owed on a loan extended earlier this year. It said it owes money to more than 100,000 creditors. The company also said in a separate filing it plans to lay off two-thirds of its 292 employees.

Under a deal signed with FTX in July BlockFi was to receive a $400 million revolving credit facility while FTX got an option to buy it for up to $240 million.

BlockFi’s bankruptcy filing also comes after two of BlockFi’s largest competitors, Celsius Network and Voyager Digital , filed for bankruptcy in July citing extreme market conditions that had resulted in losses at both companies.

Crypto lenders, the de facto banks of the crypto world, boomed during the pandemic, attracting retail customers with double-digit rates in return for their cryptocurrency deposits.

Crypto lenders are not required to hold capital or liquidity buffers like traditional lenders and some found themselves exposed when a shortage of collateral forced them – and their customers – to shoulder large losses.

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

CREDITOR LIST

BlockFi’s largest creditor is Ankura Trust, a company that represents creditors in stressed situations, and is owed $729 million. Valar Ventures, a Peter Thiel-linked venture capital fund, owns 19% of BlockFi equity shares.

BlockFi also listed the U.S. Securities and Exchange Commission as one of its largest creditors, with a $30 million claim. In February, a subsidiary of BlockFi agreed to pay $100 million to the SEC and 32 states to settle charges in connection with a retail crypto lending product the company offered to nearly 600,000 investors.

Bain Capital Ventures and Tiger Global co-led BlockFi’s March 2021 funding round, according to a press release issued by BlockFi at the time. Both firms did not immediately respond to a request for comment.

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

“Acting in the best interest of our clients is our top priority and continues to guide our path forward,” BlockFi said.

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

BlockFi had earlier paused withdrawals from its platform.

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

“BlockFi clients may ultimately recover a substantial portion of their investments,” Renzi said in the filing.

ORIGINS

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

In July, Prince had 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 shut down and have impending losses for their clients,” he said.

According to a profile of BlockFi published earlier this year by Inc, Prince was raised 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 held jobs at Orchard Platform, a broker dealer, and at Zibby, a lease-to-own lender now called Katapult (KPLT.O).

Marquez previously worked at Bond Street, a small business lending outfit that was folded in to Goldman Sachs (GS.N) in 2017, according to Inc.

Reporting by Hannah Lang in Washington, Niket Nishant and Manya Saini in Bengaluru and Elizabeth Howcroft in London
Additional reporting by Dietrich Knauth, Editing by Megan Davies, Conor Humphries, Matthew Lewis and Anna Driver

Our Standards: The Thomson Reuters Trust Principles.

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Business

BlockFi files for bankruptcy, cites FTX collapse for its troubles

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BlockFi announced on Nov. 28 that it had filed for Chapter 11 bankruptcy. The filing in the United States Bankruptcy Court for the District of New Jersey pertains to the company and its eight subsidiaries. The move comes after several days of speculation on the company’s financial health after the collapse of FTX.

According to a statement, BlockFi has $256.9 million on hand. It has filed motions “to pay employee wages and continue employee benefits without disruption.” It also seeks to “establish a Key Employee Retention Plan to ensure the company retains trained internal resources for business-critical functions” and has created an internal plan to reduce expenses.

BlockFi International has also filed for bankruptcy with the Supreme Court of Bermuda, according to the statement.

FTX US received a $400-million credit line at the end of June, leading to worries after the FTX collapse that BlockFi’s exposure would cause it to experience a liquidity crisis. BlockFi halted withdrawals on Nov. 11. In an update on its website, the company writes:

“Since the pause, our team has explored every strategic option and alternative available to us, and has remained laser-focused on our primary objective of doing the best we can for our clients. These Chapter 11 cases will enable BlockFi to stabilize the business and provide BlockFi with the opportunity to consummate a reorganization plan that maximizes value for all stakeholders, including our valued clients.”

The company also tweeted, “As part of our restructuring efforts, we will focus on recovering all obligations owed to BlockFi by counterparties, including FTX.”

In the list of top 50 creditors filed in the court documents, unsecured claims range from $275 million to West Realm Shires Inc. (FTX US) to $999,650 to an unidentified creditor. It shows a debt of $30 million to the U.S. Securities and Exchange Commission.

BlockFi reached a settlement with the SEC for $100 million in February for failing to register accounts the SEC deemed securities. West Realm Shires and the SEC were listed by name in the document, as was Ankura Trust, which provides corporate trust services “in distressed situations.” That organization is owed $729,036,246. In addition, BlockFi states in the filing that it has over 100,000 creditors, assets between $1 billion and $10 billion, and liabilities in the same range. In addition, Valar Ventures is listed as the owner of 19% of the shares in the company.

BlockFi denied that the majority of its assets were custodied at FTX, but it acknowledged, “We do have significant exposure to FTX and associated corporate entities that encompasses obligations owed to us by Alameda, assets held at FTX.com, and undrawn amounts from our credit line with FTX.US.”



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Business

BlockFi limits platform activity, including a halt on client withdrawals

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Crypto lender BlockFi has halted client withdrawals on its platform as part of a broader limit on platform activity in the wake of FTX’s collapse.

The company said in a Nov. 11 tweet that a “lack of clarity on the status of FTX.com, FTX US and Alameda” has prevented it from being able to operate as normal.

As a result, it has limited platform activity until there is further clarity on the developing situation, it said. 

The firm has also requested that clients do not deposit to BlockFi wallets or Interest Accounts at this point in time.

It comes only days after a Twitter thread in which BlockFi founder and COO Flori Marquez on Nov. 8 assuring users that all BlockFi products were fully operational, as they have a $400 million line of credit from FTX US, which is a separate entity from the one affected by a liquidity crunch.

Marquez’s comment that BlockFi “will remain an independent entity until at least July 2023” is likely a reference to the deal with FTX US that provided them with the line of credit, in which FTX US was provided an option to acquire BlockFi for a variable price up to $240 million. 

However, recent developments from FTX US, in which a banner at the top of the FTX US website said “trading may be halted on FTX US in a few days” has raised questions about the financial impact the fallout of FTX has had on its US arm.

Related: FTX US resigns from the Crypto Council for Innovation

The crypto community has not taken well to the abrupt change in language coming out of BlockFi, who had just 12 hours earlier assured customers that “all crypto transactions, including withdrawals, would continue as normal.” 

Kevin Paffrath, CEO of HouseHack and a YouTuber with 1.85 million subscribers pointed out a similar u-turn in Sam Bankman-Fried’s public comments in the lead-up to the FTX fallout.



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