BlockFi has become the latest crypto firm to collapse in the wake of FTX’s rapid downfall. The crypto company, which offers a trading exchange and interest-bearing custodial service for cryptocurrencies, was one of many firms to face serious liquidity issues due to its significant exposure to toxic FTX assets and is now seeking Chapter 11 bankruptcy protection.
The FTX Effect
The crypto lending company and eight of its affiliates have filed for Chapter 11 bankruptcy protection in the United State Bankruptcy Court for the District of New Jersey after halting withdrawals on the platform earlier this month. A BlockFi subsidiary also moved for bankruptcy in Bermuda concurrently with the American filing.
BlockFi said its exposure to Bankman-Fried and FTX was ultimately its downfall, noting that his Alameda Research trading company had defaulted on $680M of collateralized loans in early November. The company started talking with restructuring professionals in the days after FTX’s bankruptcy filing, according to people familiar with the matter.
“Since the pause, our team has explored every strategic option and alternative available to us and has remained laser-focused on our primary objective of doing the best we can for our clients”
company statement
In its bankruptcy filing, BlockFi said it owed money to more than 100,000 creditors. The largest creditor listed is Ankura Trust, a company representing distressed creditors, which is owed $729 million. FTX, BlockFi’s second-largest creditor, is owed $275 million.
BlockFi has about $257 million in cash on hand, and the company expects that will provide sufficient liquidity to support it during restructuring. According to the filing, the company estimates it has between $1 billion and $10 billion in liabilities.
Lawsuit against Bankman-Fried
Shortly after filing for Chapter 11, BlockFi filed a lawsuit against Bankman-Fried’s Emergent Fidelity Technologies vehicle, demanding they turn over collateral that BlockFi claims it is owed. According to the Financial Times, the collateral in question is Bankman-Fried’s 7.6% stake in the online trading app Robinhood. Bankman-Fried purchased a whopping $648M stake in the trading app in May 2022 through his holding company, Emergent Fidelity Technologies.
Through this latest lawsuit, BlockFi reportedly sought turnover collateral from Emergent as part of a pledge agreement from November 9th. Apparently, Emergent failed to meet a payment schedule previously agreed upon.
In the days leading up to FTX’s bankruptcy filing on November 11, Bankman-Fried had been rushing to raise billions of dollars in fresh financing. Spreadsheets he shared with investors listed his Robinhood shares as an asset.
Bankman-Fried allegedly attempted to negotiate the sale of his Robinhood shares, even after he had pledged to return the collateral to BlockFi. Reports from the Financial Times indicate that Bankman-Fried was still negotiating the sale of these assets on the evening of November 10th, just a day before FTX would file for its own Chapter 11 bankruptcy.
The Future of the Firm
BlockFi’s descent was expected as it was closely associated with FTX, with many speculating that the firm would soon reveal its own financial problems.
The firm preemptively sold roughly $239M of its cryptocurrency and warned 250 employees that they would lose their jobs in the run-up to its Chapter 11 bankruptcy filing, according to a report from Bloomberg.
BlockFi has had its first Chapter 11 hearing, where it reiterated its focus on maximizing value for all of its clients and shareholders. The Court has agreed to temporarily redact the names of individuals and clients from the list of the firm’s fifty largest creditors and is currently pursuing actions to restore withdrawal activities for BlockFi Wallet accounts.
The next hearing for the company is currently scheduled for January 9th, 2023.
