BlockFi, a cryptocurrency lender that targeted mainstream investors hungry for a piece of the crypto mania, filed for bankruptcy on Monday, battered by its financial ties to FTX, the beleaguered exchange whose recent slump has rattled the market. crypto industry at its heart.
Based in Jersey City, NJ, BlockFi primarily marketed itself to retail investors, offering them cryptocurrency-backed loans in minutes with no credit checks, as well as accounts that paid high interest on crypto deposits. As of last year, the lender claimed to have more than 450,000 retail customers.
On Monday, BlockFi, which was founded in 2017, filed for Chapter 11 protection in New Jersey. Its implosion is the latest example of an industry built on shaky foundations, with companies so intertwined that a single swing can trigger financial chaos.
BlockFi is not the first crypto lender to file for bankruptcy. In July, two of its rivals, Celsius Network and Voyager Digital, collapsed within a week of each other. They were struggling to recover after a market panic in the spring, when the value of many top cryptocurrencies fell. Bitcoin alone fell 20% in one week.
BlockFi had been in shock ever since. To stabilize, the lender struck a deal with FTX in June, which at the time was seen as a safety net given the exchange’s credibility and dominance in the crypto industry. FTX agreed to provide the company with a $400 million line of credit — essentially a loan that BlockFi could tap into as needed.
The consequences of the fall of FTX
The sudden collapse of the crypto exchange left the industry stunned.
- A spectacular rise and fall: Who is Sam Bankman-Fried and how did he become the face of crypto? The Daily charted the dramatic rise and fall of the man behind FTX.
- A symbiotic relationship: Mr. Bankman-Fried built FTX in part to help the business operations of Alameda Research, his first company. The links between the two entities are now under scrutiny.
- Missing assets: FTX lawyers said a significant portion of the company’s assets were stolen or missing, casting doubt on the chances of recovering billions of dollars in crypto that customers lost.
- An influence offer: In just three years, Mr. Bankman-Fried has put together a massive operation to woo politicians, regulators and nonprofits to support his crypto goals. Here’s how.
In announcing the funding, Zac Prince, the chief executive of BlockFi, said this would provide “access to capital that would further strengthen our balance sheet”. The deal also gave FTX the option to buy BlockFi.
BlockFi then borrowed $275 million from a subsidiary of FTX, according to its bankruptcy filings. This financial entanglement meant that when FTX flipped and was forced to file for bankruptcy amid revelations of corporate missteps and suspicious management, BlockFi also began to struggle.
Days after the exchange collapsed, BlockFi told customers they couldn’t withdraw their deposits because it had “significant exposure” to FTX, including additional funds the company hoped to tap into as part. of the agreement and other assets held on the FTX platform. .
In its Monday filing, BlockFi said it has about $257 million in cash to help support its business through bankruptcy. The company said in court filings that it had more than 100,000 creditors, as well as $10 billion in assets and liabilities. He also said he would significantly reduce expenses, including labor costs. It employed 850 people last year.
BlockFi also said it would focus on collecting all obligations owed to the company, including those of FTX. However, he warned of delays in recovering FTX’s assets given the exchange’s bankruptcy.
John J. Ray III, the new chief executive of FTX, who previously ran Enron during its bankruptcy, called the corporate dysfunction at FTX “unprecedented.” Legal experts say it could take years to unwind and recover the assets.
Regulators had previously reviewed BlockFi. In February, the Securities and Exchange Commission reached a $100 million settlement with the company’s lending arm for offering loans without registering them as securities and for failing to register as an investment company. investment. The SEC also found that BlockFi made false and misleading statements about the level of risk in its loan portfolio and lending activities.
BlockFi still owes the SEC $30 million, according to its bankruptcy filing, making the nation’s top securities agent its fourth-largest creditor. He owes $275 million to West Realm Shires, the parent company of FTX’s US exchange and BlockFi’s second largest creditor. Its main creditor, at around $729 million, is Ankura Trust Company, which specializes in servicing loans to distressed businesses.
“Since its inception, BlockFi has worked to positively shape the cryptocurrency industry and advance the sector,” said Mark Renzi of Berkeley Research Group, the firm’s financial advisor. “BlockFi looks forward to a transparent process that achieves the best outcome for all customers and other stakeholders.”
BlockFi’s other bankruptcy advisers include law firm Haynes and Boone, investment bank Moelis & Company, and strategic adviser C Street Advisory Group.
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