BlockFi, a cryptocurrency lender, announced on Monday that it has filed for Chapter 11 bankruptcy protection, becoming the latest company to fail in the market after being exposed to the stunning collapse of the FTX exchange earlier this month.
The court petition in New Jersey comes as cryptocurrency values have fallen sharply. The cost of bitcoin, by far the most widely used digital currency, has decreased by more than 70% since its peak in 2021.
According to Monsur Hussain, senior director at Fitch Ratings, BlockFi’s Chapter 11 restructuring shows considerable asset contagion risks connected with the crypto ecosystem.
BlockFi, a company situated in New Jersey and owned by former finance executive turned cryptocurrency entrepreneur Zac Prince, claimed in a bankruptcy petition that a liquidity crisis was brought on by its significant exposure to FTX. Sam Bankman-Fried, the founder of FTX, filed for protection in the US this month after investors withdrew $6 billion from the exchange in just three days and Binance, a rival exchange, abandoned a rescue plan.
The bankruptcy filing was made by Mark Renzi, managing director of Berkeley Research Group, the intended financial advisor for BlockFi. The debtors do not face the many challenges obviously plaguing FTX. However, the debtors’ exposure to FTX is a primary cause of this bankruptcy filing. Quite the contrary.
The liquidity crisis, according to BlockFi, was caused by its exposure to FTX through loans to Alameda, a crypto trading firm linked with FTX, as well as bitcoins kept on FTX’s platform that were locked there. BlockFi’s assets and liabilities were listed as being between $1 billion and $10 billion.
In a separate lawsuit filed on Monday, BlockFi sought to reclaim shares of Robinhood Markets Inc (HOOD.O), which had been pledged as collateral three weeks earlier, before BlockFi and FTX sought bankruptcy protection.
Renzi said that earlier in November, BlockFi had liquidated a portion of its cryptocurrency holdings to pay for its bankruptcy. BlockFi now has $256.5 million in cash on hand thanks to the $238.6 million in cash earned from those sales.
BlockFi cited FTX as its second-largest creditor in a court statement on Monday, with $275 million owing on a loan made earlier this year. It claimed to owe more than 100,000 debtors money. Additionally, the business revealed in a separate filing that it intends to fire two-thirds of its 292 staff members.
BlockFi was to receive a $400 million revolving credit facility as part of a contract inked with FTX in July, and FTX was given the option to purchase it for up to $240 million.
BlockFi also filed for bankruptcy after two of its biggest rivals, Celsius Network and Voyager Digital, did so in July, citing adverse market conditions that had caused losses at both businesses.
During the pandemic, crypto lenders—the de facto banks of the cryptocurrency world—exploded, luring retail clients with double-digit rates in exchange for their cryptocurrency deposits.
Unlike traditional lenders, crypto lenders are not allowed to keep capital or liquidity buffers, and several of them found themselves exposed when a lack of collateral forced them—and their customers—to bear significant losses.
The first bankruptcy hearing for BlockFi will take place on Tuesday.
CREDITOR LIST
Ankura Trust, which represents creditors in difficult situations and is due $729 million, is BlockFi’s biggest creditor. 19% of the equity shares in BlockFi are owned by Valar Ventures, a venture capital firm affiliated with Peter Thiel.
The U.S. Securities and Exchange Commission was also mentioned by BlockFi as one of its biggest debtors, with a $30 million claim. A BlockFi subsidiary agreed to pay the SEC and 32 states $100 million in February to resolve allegations relating to a retail cryptocurrency loan program the company provided to almost 600,000 investors.
According to a news announcement, BlockFi’s March 2021 investment round was co-led by Bain Capital Ventures and Tiger Global. An inquiry for comments was not immediately answered by either company.
According to BlockFi, the company will be able to stabilize its operations and maximize value for all stakeholders as a result of its Chapter 11 lawsuits.
Acting in their clients best interests is their first goal, and it continues to direct their course forward, according to BlockFi.
BlockFi claimed to have retained Kirkland & Ellis and Haynes & Boone as its bankruptcy attorneys in its bankruptcy filing.
Before, BlockFi had halted withdrawals from its system.
Renzi stated in a filing that Blockfi plans to ask for permission to honour client withdrawal requests from the customer wallet accounts where custody of the cryptocurrency is kept. The business did not, however, make any arrangements regarding how it may handle withdrawal requests from its other products, such as interest-bearing accounts.
According to Renzi’s filing, BlockFi clients may ultimately recoup a significant amount of their money.
ORIGINS
Prince, who serves as the business’s chief executive officer, and Flori Marquez created BlockFi in 2017. According to its website, BlockFi has offices not only in Jersey City but also in New York, Singapore, Poland, and Argentina.
Prince tweeted in July, It’s time to stop lumping BlockFi in the same category/ phrase as Voyager and Celsius.
We looked the same two months ago. They have shut down and are about to incur losses for their clients, He stated.
According to an earlier this year Inc feature of BlockFi, Prince was reared in San Antonio, Texas, and paid for his college tuition at the University of Oklahoma and Texas State University with profits from online poker tournaments. Prior to launching BlockFi with Marquez, he worked at Orchard Platform, a broker dealer, and Zibby, a lease-to-own lender that is now known as Katapult (KPLT.O).
According to Inc., Marquez previously worked for Bond Street, a small company loan firm that was absorbed by Goldman Sachs in 2017.
