Digital asset lender BlockFi files for bankruptcy over huge exposure to FTX

Cryptocurrency lender BlockFi has said it filed for Chapter 11 bankruptcy protection, the latest industry casualty after the firm was hurt by exposure to the collapse of the FTX exchange earlier this month.

The filing in a New Jersey court comes as cryptocurrency prices have plummeted. The price of bitcoin, the most popular digital currency by far, is down by more than 70 per cent from a 2021 peak.

“BlockFi’s Chapter 11 restructuring underscores significant asset contagion risks associated with the crypto ecosystem,” said Monsur Hussain, senior director at Fitch Ratings.

BlockFi, founded by fintech executive-turned-crypto entrepreneur Zac Prince, said in a bankruptcy filing its substantial exposure to FTX created a liquidity crisis.

FTX, founded by Sam Bankman-Fried, filed for protection in the United States this month after traders pulled US$6 billion from the platform in three days and rival exchange Binance abandoned a rescue deal.

“Although the debtors’ exposure to FTX is a major cause of this bankruptcy filing, the debtors do not face the myriad issues apparently facing FTX,” said the bankruptcy filing by Mark Renzi, managing director at Berkeley Research Group, the proposed financial adviser for BlockFi. “Quite the opposite.”

BlockFi said the liquidity crisis was due to its exposure to FTX via loans to Alameda, a cryptocurrency trading firm affiliated with FTX, as well as cryptocurrencies held on FTX’s platform that became trapped there. BlockFi listed its assets and liabilities as being between US$1 billion and US$10 billion.

BlockFi on Monday also sued a holding company for BankmanFried, seeking to recover shares in Robinhood Markets pledged as collateral three weeks ago, before BlockFi and FTX filed for bankruptcy protection.

Renzi said BlockFi had sold a portion of its virtual assets earlier this month to fund its bankruptcy. Those sales raised US$238.6 million in cash, and BlockFi now has US$256.5 million in cash on hand.

In a court filing on Monday, BlockFi listed FTX as its secondlargest creditor, with US$275 million owed on a loan extended earlier this year. It said it owed money to more than 100,000 creditors. The firm also said in a separate filing it planned to lay off two-thirds of its 292 employees.

Under a deal signed with FTX in July, BlockFi was to receive a US$400 million revolving credit facility while FTX got an option to buy it for up to US$240 million.

BlockFi’s bankruptcy filing also comes after two of its largest competitors, Celsius Network and Voyager Digital, filed for bankruptcy in July, citing extreme market conditions.

Cryptocurrency lenders boomed during the pandemic, attracting retail customers with double-digit rates in return for their cryptocurrency deposits.

They are not required to hold capital or liquidity buffers like traditional lenders and some found themselves exposed when a shortage of collateral forced them to shoulder large losses.

BlockFi’s first bankruptcy hearing was scheduled to take place yesterday.

FTX did not respond to a request for comment.

BlockFi’s largest creditor is Ankura Trust, which represents creditors in stressed situations and is owed US$729 million. Valar Ventures, a Peter Thiel-linked venture capital fund, owns 19 per cent of BlockFi’s equity shares.

BlockFi also listed the US Securities and Exchange Commission as one of its largest creditors, with a US$30 million claim. In February, a BlockFi unit agreed to pay US$100 million to the commission and 32 states to settle charges in connection with a retail cryptocurrency lending product the company offered to nearly 600,000 investors.

Bain Capital Ventures and Tiger Global co-led BlockFi’s March 2021 funding round, BlockFi said in a press release issued at the time. Both firms did not immediately respond to a request for comment.

In a blog post, BlockFi said its Chapter 11 cases would enable the company to stabilise its business and maximise value for all stakeholders.

“Acting in the best interest of our clients is our top priority and continues to guide our path forward,” BlockFi said.

BlockFi had earlier paused withdrawals from its platform.

In a filing, Renzi said BlockFi intended to seek authority to honour client withdrawal requests from its customer wallet accounts, in which virtual assets are held in custody. However, the company did not disclose plans for how it might treat withdrawal requests from its other products.

“BlockFi clients may ultimately recover a substantial portion of their investments,” Renzi said in the filing.