Another crypto bust: BlockFi files for bankruptcy

Crypto lender BlockFi filed for bankruptcy on Monday in the widening contagion following the implosion of crypto exchange FTX.

The company was first caught out by the collapse of algorithmic stablecoin TerraUSD and its sister coin Luna in May.

A subsequent capital injection and rescue by FTX failed this month, when the crypto exchange suffered a customer run on deposits and was forced to file for bankruptcy itself.

One of the main debtors in the Chapter 11 petition filed in New Jersey is BlockFi International Ltd, which was moved from Cayman to Bermuda in January of this year.

Another Cayman entity, BlockFi Lending Cayman LLC, is not part of the debtor group.

The New Jersey petition said BlockFi has between US$1 billion and US$10 billion in assets and liabilities.

BlockFi said in a statement on Monday that it will use the Chapter 11 process to “focus on recovering all obligations owed to BlockFi by its counterparties, including FTX and associated corporate entities”, but cautioned that such recoveries were likely to be delayed by FTX’s bankruptcy.

BlockFi suspended withdrawals on 11 Nov. during FTX’s rapid demise, citing the uncertainty surrounding the exchange. FTX had provided BlockFi with a $250 million emergency line of credit in July and received the option to buy the crypto lender.

FTX also provided collateral on loans to Alameda Research, FTX founder Sam Bankman-Fried’s now-defunct hedge fund.

This collateral in the form of a 7.6% shareholding in online trading company Robinhood is subject to a separate lawsuit.

BlockFi claims that on 9 Nov. it entered into an agreement with Bankman-Fried’s Emergent Fidelity Technologies to guarantee payment obligations from an unnamed borrower, separately identified as Alameda, by pledging certain common stock that was never delivered. BlockFi is suing to seize the stake in Robinhood.

Ankura Trust Company, which acts as trustee for BlockFi’s interest-bearing accounts, is the company’s largest creditor with a claim for $729 million, the bankruptcy filing shows.

West Realm Shires Inc, a former holding company for Bankman-Fried’s assets, which is now in bankruptcy, is owed $275,000.

The US Securities and Exchange Commission is the fourth-largest creditor with a claim for $30 million that stems from a $100 million settlement in February of this year.

The SEC imposed the largest-ever penalty for a crypto firm on BlockFi for failing to register the offer and sale of its crypto lending product under the Investment Company Act.