BlockFi has become the latest company to declare bankruptcy, citing “significant exposure” to FTX BlockFi has sued FTX to recover shares in Robinhood, which it claims Bankman-Fried had pledged as collateral BlockFi’s bankruptcy was slow to come, with the company rescued by a $400 million credit line from FTX earlier this year Regulation simply must hit the ground running as customers continue to be hurt Another soldier down. In a move absolutely everyone foresaw, BlockFi filed for bankruptcy on Monday. The distressed crypto lender’s court filings reveal that it has over 100,000 creditors and blames “significant exposure” to insolvent exchange FTX. It’s yet another black mark on the cryptography copybook, which is rapidly running out of space.
BlockFi bankruptcy was coming
BlockFi suspended withdrawals after the FTX collapse nearly three weeks ago. As investors in Celsius, Voyager Digital, and so many other platforms will tell you, this is often the last straw. It’s hard to gain customers’ trust when you won’t let them withdraw their money. And so this week’s order is no surprise. BlockFi said it was hopeful of a resurgence. She revealed a cash on hand of $257 million, which she says is enough to get her through the bankruptcy process, allowing her to avoid debtor-in-possession financing. Call me cynical, but I can’t see how the company recovers from this. BlockFi consultant Mark Renzi stated that BlockFi is “well positioned to move forward, despite the fact that 2022 was an exceptionally dire year for the cryptocurrency industry.” Hmmm. If this is well positioned, I need to redo the Portuguese classes. As I said, I can’t see how customers will ever trust BlockFi with their funds again. Not to mention that glaring big hole in their balance sheet and the small matter of them literally filing for bankruptcy.
BlockFi processes FTX
BlockFi is also suing FTX for shares of Robinhood, which the lender alleges Sam Bankman-Fried pledged as collateral against loans he defaulted on. Bankman-Fried bought a 7.6% stake in Robinhood earlier this year. The additional legal issue – aside from the bankruptcy filing, just to be clear – simply highlights how messed up and incestuous this whole thing is. As I wrote in dissecting what’s next for crypto, Bankman-Fried has gotten into too much, and the process of unraveling this disaster will not be fun. Much of this ties back to Luna’s collapse earlier this year, which is supposedly when FTX’s sister trading firm, Alameda, had a lot of borrowing requested, having been caught up in the contagion. FTX sent assets from customers of the exchange, with the now-defunct FTT token pledged as collateral. The same token that FTX created. BlockFi had its own problems in the midst of this, of course. They were forced to sign a deal with FTX for a $400 million line of credit (I told you – incestuous!) to keep the doors open. The deal also gave FTX the right to acquire BlockFi anytime until July 2023. Ironically, it is the same white knight – Sam Bankman-Fried – who is now unleashing the latest batch of contagion, having said that this is exactly what he was trying to neutralize with all his rescues earlier this year. And this time, BlockFi has fallen.
2) also: “I do feel like we have a responsibility to seriously consider stepping in, even if it is at a loss to ourselves, to stem contagion,” he said. “Even if we weren’t the ones who caused it, or weren’t involved in it. I think that’s what’s healthy for the ecosystem…” — SBF (@SBF_FTX) June 19, 2022
While creating this article, I found the below tweet I made about BlockFi, who reacted to the Celsius implosion by sending me an email announcing higher yields. I think it’s fair to see some of these companies practicing less than stellar risk management, don’t you think?
Some people really need to read the room @BlockFi pic.twitter.com/gwA8RJ1wgB
— Dan Ashmore (@DanniiAshmore) July 8, 2022
What’s next for BlockFi customers?
Unfortunately, customers now face a long wait. Like, a really long wait. Mt Gox, the former exchange that once captured 70% of the Bitcoin trading market, went bankrupt in 2014 and customers still haven’t seen a dime. Hopefully it won’t take that long, but Chapter 11 of US law is not an overnight process. As John Ray III said in court filings shortly after taking over as CEO of FTX to guide them through the bankruptcy process, “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of reliable financial information as has occurred. here”. And this is the same John Ray III who oversaw the Enron bankruptcy, one of the worst bankruptcy cases in financial history. It was already obvious, but it becomes more so every day: the cryptocurrency space needs a complete regulatory overhaul. At this point, some common sense would also be good.
