Crypto lender BlockFi files for bankruptcy, citing Health & Fitness Journal FTX exposure

©Health & Fitness Journal. FILE PHOTO: Representations of cryptocurrencies are submerged in water in this May 23, 2022 illustration. REUTERS/Dado Ruvic/Illustration/File Photo

By Hannah Lang, Niket Nishant, and Manya Saini

(Health & Fitness Journal) – Cryptocurrency lender BlockFi has filed for Chapter 11 bankruptcy protection, the industry’s latest victim, said Monday, after the company was hurt by 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, by far the most popular digital currency, is down more than 70% from a 2021 peak.

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

New Jersey-based BlockFi, founded by fintech manager and crypto entrepreneur Zac Prince, said in a bankruptcy filing that its significant exposure to FTX caused a liquidity crisis. FTX, founded by Sam Bankman-Fried, filed for protection in the United States this month after traders pulled $6 billion from the platform in three days and rival exchange Binance abandoned a bailout deal.

“While the Debtors’ exposure to FTX is a primary cause of this bankruptcy filing, the Debtors do not face the myriad of issues that FTX appears to be facing,” the bankruptcy filing by Mark Renzi, chief executive of Berkeley Research Group, reads the proposed bankruptcy filing Financial Advisor for BlockFi. “But on the contrary.”

BlockFi said the liquidity crunch was due to its exposure to FTX via loans to Alameda, an FTX-affiliated crypto trading company, as well as cryptocurrencies held and trapped on FTX’s platform. BlockFi listed its assets and liabilities as valued at between $1 billion and $10 billion.

BlockFi also on Monday sued a Bankman-Fried holding company that is trying to regain Robinhood Markets Inc (NASDAQ:) stock that was pledged as collateral three weeks ago, before BlockFi and FTX filed for bankruptcy protection.

Renzi said BlockFi sold some of its crypto assets in early November to fund its bankruptcy. These sales raised $238.6 million in cash, and BlockFi now has $256.5 million in cash.

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

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

BlockFi’s bankruptcy filing also comes after two of BlockFi’s biggest 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 interest 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 vulnerable when a lack of collateral forced them – and their clients – to suffer 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, which represents creditors in stressed situations and is owed $729 million. Valar Ventures, a venture capital fund affiliated with Peter Thiel, owns 19% of BlockFi shares.

BlockFi also listed the US Securities and Exchange Commission as one of its largest creditors with a $30 million claim. In February, a BlockFi subsidiary agreed to pay $100 million to the SEC and 32 states to settle fees related to 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, BlockFi said in a press release issued at the time. Both companies did not immediately respond to a request for comment.

In a blog post, BlockFi said its Chapter 11 cases will allow the company to stabilize its business and maximize value for everyone involved.

“Acting in the best interests of our customers is our top priority and continues to guide us forward,” said BlockFi.

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

BlockFi previously suspended withdrawals from its platform.

In a filing, Renzi said Blockfi intends to seek the authority to fulfill customer withdrawal requests from its customer wallet accounts, which hold crypto assets. However, the company didn’t announce any plans for how it might handle withdrawal requests from its other products, including interest-bearing accounts.

“BlockFi customers can ultimately recover a significant portion of their investment,” Renzi said in the filing.

ORIGIN

BlockFi was founded in 2017 by Prince, the company’s current Chief Executive Officer, and Flori Marquez. Although BlockFi is headquartered in Jersey City, it 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/pack as Voyager and Celsius.”

“Two months ago we looked ‘the same.’ They’re closing and they’re facing losses for their customers,” he said.

According to a BlockFi profile released by Inc earlier this year, Prince grew up in San Antonio, Texas and funded his college education at the University of Oklahoma and Texas State University with online poker tournament winnings. Before founding BlockFi with Marquez, he had jobs at Orchard Platform, a broker-dealer, and at Zibby, a lease-to-own lender now called Katapult.

Marquez previously worked at Bond Street, a small business lender that Inc. merged into Goldman Sachs (NYSE:) in 2017.