Contagion fears in cryptocurrency markets continue to grow after BlockFi filed for bankruptcy on Monday due to the company’s financial ties to failed crypto exchange FTX.
He now says he owes over 100,000 creditors between $1 billion and $10 billion. Eight of its affiliates are in Chapter 11 bankruptcy proceedings.
BlockFi, a lending platform in the crypto space, allowed individuals to use cryptocurrencies as collateral for US dollar-denominated loans. It eventually peaked at a valuation of around $3 billion in early 2021.
CRYPTOLENDER BLOCKFI SUITE FTX IN BANKRUPTCY
When crypto assets experienced a downturn over the past year, falling prices meant that the value of collateral was lower than the value of many outstanding BlockFi loans. This caused him liquidity problems and entered into a loan agreement with Sam Bankman-Fried’s FTX in July as part of an effort to shore up his books.
Bitcoin, for example, fell to the $16,000 level, down over 71% in the past 12 months.
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 had played a similar role for dozens of companies through acquisitions and investments, and the deal gave BlockFi an essential lifeline. BlockFi has also provided loans to FTX’s sister company, a hedge fund known as Alameda Research.
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After FTX imploded and Bankman-Fried quit as his former company entered bankruptcy proceedings, BlockFi’s ties to FTX worsened his financial situation.
Amid FTX’s collapse and bankruptcy, BlockFi “got trapped” and unable to access its credit facility. It was later forced to stop withdrawals from its platform and asked customers not to make deposits to their digital wallets or accounts.
One of these creditors is the federal government. In February, BlockFi agreed to pay the Securities and Exchange Commission (SEC) a total of $100 million in penalties after failing to record offers and sales of its retail crypto lending product. The company still owes the SEC $30 million as it begins bankruptcy proceedings.
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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 that can provide enough liquidity to support some of its operations during the bankruptcy. restructuring.
It is unclear at this time what impact the collapse of FTX and Alameda Research will have on BlockFi’s bankruptcy proceedings and vice versa. BlockFi owes $275 million to FTX, while Alameda Research owes BlockFi the $680 million in loans it received before its implosion, according to bankruptcy filings.
Although BlockFi’s exposure to FTX drove it into bankruptcy, it may not have exhibited corporate control failures similar to those of FTX.
In BlockFi’s bankruptcy filings, the company’s financial adviser said, “To date, I have not found any deficiencies in the business controls or systems integrity, and I have found that BlockFi’s financial information was trustworthy.” This statement stands in stark contrast to the situation at FTX, where the company’s new CEO noted “widespread failures” of corporate controls in bankruptcy filings and said there was a “complete lack of financial reporting.” reliable”.
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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 was not personally named as a defendant in the lawsuit.
BlockFi’s lawsuit claims that the holding company, known as Emergent Fidelity Technologies Ltd., defaulted on its obligations to repay Alameda Research’s debts with shares of Robinhood Markets Inc. as collateral. The arrangement was completed three weeks ago before FTX and BlockFi went bankrupt. Emergent owns a 7.42% share of Robinhood, according to Eikon data.
During a bankruptcy court hearing on Tuesday, a lawyer for BlockFi said the company intends to allow customers to resume withdrawals from their digital wallets in the near future and that those funds do not belong to the succession of the company.
Ernie Sadashige of Fox Business and Reuters contributed to this report.
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