January 28, 2023

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BlockFi files for bankruptcy as FTX fallout spreads

BlockFi files for bankruptcy as FTX fallout spreads

BlockFi, the cryptocurrency lender that targeted ordinary investors excited about part of the cryptocurrency mania, filed for bankruptcy on Monday, over its financial ties to FTXthe embattled exchange whose recent collapse has shaken the crypto industry to its core.

Headquartered in Jersey City, NJ, BlockFi has marketed itself primarily to small investors, offering them crypto-backed loans in minutes without a credit check, as well as accounts that paid high interest on crypto deposits. As of last year, the lender claimed to have more than 450,000 retail customers.

On Monday, BlockFi, which was founded in 2017, filed for Chapter 11 protection in New Jersey. Its implosion is the latest example of an industry built on shaky foundations, with companies so intertwined that one wiggle can unleash financial chaos.

BlockFi is not the first crypto lender to file for bankruptcy. In July, two of its competitors, Celsius Network and Voyager Digital, collapsed within a week of each other. They have been struggling to correct themselves after the spring market panic, when several prominent cryptocurrencies plunged in value. Bitcoin alone is down 20 percent in a week.

BlockFi has been reeling ever since. To stabilize it, the lender struck a deal with FTX in June, which was seen as a safety net at the time given the exchange’s credibility and dominance in the cryptocurrency industry. FTX agreed provide The company has a credit line of $400 million – a loan that BlockFi can draw upon as needed.

Announcing the funding, BlockFi CEO Zac Prince said, He said It will provide “access to capital that further strengthens our balance sheet.” The deal also gave FTX the option to buy BlockFi.

BlockFi later borrowed $275 million from a subsidiary of FTX, according to its bankruptcy filings. This financial tangle meant that when FTX was dropped and was forced to file for bankruptcy amid revelations Corporate slip-ups and suspicious managementBlockFi is also starting to struggle.

A few days after the stock market crash, BlockFi Tell Customers who were unable to withdraw their deposits because they had “significant exposure” to FTX, including the additional funds the company was hoping to make use of under the agreement and other assets held on the FTX platform.

In its filing on Monday, BlockFi said it had about $257 million in cash on hand to help support its business through bankruptcy. The company said in court filings that it has more than 100,000 creditors, in addition to $10 billion in assets and liabilities. It also said it would significantly reduce expenses, including labor costs. It employed 850 people as of last year.

BlockFi also said that it will focus on recovering all liabilities owed to the company, including FTX liabilities. However, it warned of delays in recovering assets from FTX due to the exchange’s bankruptcy.

John J. Ray III, FTX’s new CEO, who previously led Enron during its bankruptcy, called FTX’s corporate imbalance “unprecedented.” Legal experts say it could take years to dispose of and recover the assets.

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Regulators have already been scrutinizing BlockFi. In February, the Securities and Exchange Commission reached out to A $100 million settlement With the company’s lending arm to provide loans without registering them as securities, and not registering themselves as an investment company. The SEC also found that BlockFi made false and misleading statements about the level of risk in its loan portfolio and lending activity.

BlockFi still owes the SEC $30 million, according to its bankruptcy filing, making the country’s largest security owed its fourth-largest creditor. It owes $275 million to West Realm Shares, the parent company of the US stock exchange FTX and BlockFi’s second largest creditor. The company’s largest creditor, at about $729 million, is Ankura Trust, which specializes in managing loans for troubled companies.

“Since its inception, BlockFi has positively shaped the cryptocurrency industry and developed the sector,” said Marc Renzi of Berkeley Research Group, the firm’s financial advisor. “BlockFi looks forward to a transparent process that brings the best results to all customers and other stakeholders.”

Other bankruptcy advisors at BlockFi include law firm Haynes and Boone, investment bank Moelis & Company and strategic advisor C Street Advisory Group.