The short second life of Blockfi

The short second life of Blockfi

December 5, 2022 Off By Mags Smith

After getting a second lease on life back in July, the BlockFi cryptocurrency exchange has filed for chapter 11 bankruptcy protection. 

This marks the latest Crypto currency exchange to go bust this year after the crypto market was plunged into a crypto-winter with the price Bitcoin plummeting 70% from it’s all time high. As crypto lenders are not required to hold capital or liquidity buffers like their traditional fiat counterparts, the sudden downturn in the market left many lenders with their pants down. Forcing their customers as well as themselves to face monumental losses. 

Founder of the CEX, Zac Prince, cited their exposure to parent company FTX, which recently filled for bankruptcy after Binance bailed on a buyout. This exposure stems from loans made to Alameda as the main cause of the liquidity issues faced by the exchange. In court documents BlockFi listed FTX, which owes the company $275 million,  as its second largest creditor.

Their largest creditor is Ankura Trust to which the exchange owes $729 million. The SEC has also made its list of creditors, to which BlockFi owes $30 million off the back of an out of court settlement for failing to register the offers and sales of its retail crypto lending product with the commission. 

According to a blog post penned by BlockFi, the exchange hopes that it’s chapter 11 cases will help stabilize the exchange and maximise outcomes for all stakeholders. 

“Acting in the best interest of our clients is our top priority and continues to guide our path forward,” BlockFi said. The exchange has since fought to stay a float through a myriad of court battles and asset sales.

Filings indicate that Kirkland & Ellis and Haynes & Boone have been retained by BlockFi as bankruptcy counsel with Berkley Research Group as their proposed financial advisor. According to Mark Renzi Managing Director at Berkley there still seems to be some hope in propping up the failed CEX, stating that: “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, quite the opposite.”

BlockFi has also filed a lawsuit against Emergent Fidelity Technologies, one of Sam Bankman-Fried’s holding companies, for its shares in Robinhood, after they were pledged to BlockFi to guarantee the payment obligations of Alameda Research.

According to Renzi, BlockFi sold $238.6 million worth of crypto assets earlier in the year to fund its bankruptcy, and the exchange now has $256.5 million in cash on hand.

BlockFi’s first bankruptcy hearing is scheduled to take place on Tuesday. Where it is expected that Blockfi will seek authority to honour client withdrawal requests. However, court documents have made no mention of  withdrawal requests from its other products, including staked assets. Ultimately whilst clients may recover a significant portion of their assets, major losses are still likely.