Crypto lender BlockFi files for Chapter 11, set to sue SBF

The fallout from the failure of FTX became the last straw that crushed the troubled crypto company that was already struggling to recover from the 3AC collapse in June.

Sorry, we're under chapter 11 - stock photo

Another one bites the dust: crypto lender BlockFi Inc. and its eight subsidiaries filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the District of New Jersey on November 28, becoming the latest casualty claimed by FTX contagion this month.

The filing comes less than three weeks after BlockFi paused client withdrawals, citing “the lack of clarity” over the status of FTX and its sister quant trading firm Alameda Research. The crypto lender, which was on the brink of bankruptcy after the 3AC implosion left it with $80 million in bad debt, agreed to be taken over by FTX in exchange for a $400 million revolving credit facility — a rather nominal amount of money for a company valued at $3 billion in March 2021.

“Until there is further clarity, we are limiting platform activity, including pausing client withdrawals as allowed under our Terms. We will share more specifics as soon as possible. We request that clients not deposit to BlockFi wallet or Interest Accounts at this time,” the platform said in a statement, adding that it was exploring “all options” with outside advisers.

According to Bloomberg, BlockFi was in the process of moving its assets to FTX for custody, although the majority of its assets had not been moved yet. The company had also given loans to Alameda Research and FTX, which were overcollateralized with liquid assets, including Robinhood shares.

“We do have significant exposure to FTX and associated corporate entities that encompasses obligations owed to us by Alameda, assets held at, and undrawn amounts from our credit line with FTX.US,” BlockFi acknowledged earlier in a statement shared with Reuters.

BlockFi never took custody of the collateral shares — and is now suing Bankman-Fried’s Emergent Fidelity Technologies and ED&F Man Capital Markets for failing to carry out their obligations of the pledge agreement.

“EDFM—Emergent’s broker who is designated as the custodial entity under the Pledge Agreement—holds the Collateral in a specified numbered account. Following the event of default, BlockFi sought to have the Collateral transferred to it, but EDFM has refused to transfer the Collateral to BlockFi,” the complaint said.

According to a letter filed with the Securities and Exchange Commission on May 12, Emergent owned about 56.2 million shares or 7.6% of Robinhood Class A common stock.

As per BlockFi bankruptcy filing, the company has more than 100,000 creditors, with liabilities and assets ranging from $1 billion to $10 billion. The company’s largest creditor, Ankura Trust, is owed $729 million. Additionally, BlockFi owes $275 million to West Realm Shires Inc., the parent company of FTX US, and has yet to pay $30 million to the SEC as part of the $100 million settlement.

“As part of its restructuring efforts, the Company will focus on recovering all obligations owed to BlockFi by its counterparties, including FTX and associated corporate entities,” the company stated in a bankruptcy filing, adding that it has enough cash in hand to support operations during the restructuring process.

For context, Genesis Global Capital, the lending unit of Genesis Trading, paused client withdrawals on November 16, citing “extreme market dislocation and loss of industry confidence caused by the FTX implosion.” Meanwhile, Binance announced that it will launch a crypto relief fund for projects that are “otherwise strong, but in a liquidity crisis” and called upon other industry leaders to contribute.