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BlockFi Files for Bankruptcy and Sues Investment Firm
December 5, 2022
BlockFi Files for Bankruptcy and Sues Investment Firm
December 5, 2022
BlockFi Files for Bankruptcy and Sues Bankman-Fried’s Investment Firm
BlockFi, the crypto lending platform that had exposure to FTX filed for bankruptcy last week, and immediately sued FTX founder Sam Bankman-Fried over $648 million worth of Robinhood shares.
The crypto platform was already ensuring a rocky 2022 before the collapse of FTX left it facing a huge liquidity problem – a problem that was clearly insurmountable, with the company failing to raise enough capital to keep going.
BlockFi’s troubles date back to July last year when three states accused the firm of selling unregistered securities through its BlockFi Interest Account (BIA) product. The Alabama Securities Commission, New Jersey’s Bureau of Securities, and the Texas State Securities Board, all issued cease-and-desist letters to BlockFi at the same time.
The cases were all wrapped up into 1 charge by the U.S. Securities and Exchange Commission, which eventually fined BlockFi “failing to register the offers and sales of its retail crypto lending product” and “violating the registration provisions of the Investment Company Act of 1940”.
BlockFi files for bankruptcy after suffering severe penalties
In February, BlockFi agreed to a two-pronged penalty; a $50 million fine and an additional $50 million in fines “to 32 states to settle similar charges.”
Four months later BlockFi shaved 20% of its workforce, just days before it was hit with a $943,000 fine by the State of Iowa over the same securities transgressions. Desperate for money to keep afloat, especially in the wake of the collapse of Three Arrows Capital, BlockFi took out a “flexible” loan from FTX. This loan started out at $250 million, but as BlockFi’s bankruptcy filing showed, it certainly didn’t stop there.
In the midst of the FTX chaos in early November, BlockFi halted withdrawals, citing a need to see how the FTX situation would resolve itself. It was rumored to be considering bankruptcy, and this is indeed what happened – last week, BlockFi filed for Chapter 11 bankruptcy and began laying off more staff.
The bankruptcy filings laid bare the extent of the problem – the company has around 100,000 creditors and over $1 billion in liabilities, with just $256 million in cash, although it expects to be able to provide sufficient liquidity to support it during restructuring.
FTX is the second biggest creditor with $275 million owed to it, but there was already more to this than was present in the bankruptcy filing.
BlockFi sues Bankman-Fried-owned investment firm
In the hours before BlockFi filed for bankruptcy, it sued Emergent Fidelity Technologies, the investment vehicle owned by FTX founder, Sam Bankman-Fried, over a loan default suffered by Alameda Research, FTX’s trading arm.
BlockFi says that Alameda defaulted on the $680 million loan in early November when FTX went down, and as payment, BlockFi is demanding 56.3 million shares in the trading company Robinhood that Emergent purchased earlier this year.
BlockFi cites the link between Emergent and Alameda as the reason why the former should be liable for paying up for the latter’s default, which today is valued at $539.92 million. The Financial Times alleges that Bankman-Fried was trying to privately offload these shares, equating to 7.6% of the company, in the days before FTX collapsed, but wasn’t able to do so.
BlockFi said that its bankruptcy would enable it to “stabilize the business and provide BlockFi with the opportunity to consummate a reorganization plan that maximizes value for all stakeholders, including our valued clients.”
It also promised that it will “continue to work on recovering all obligations owed to BlockFi as promptly as practicable”, although, at the moment, the chances of customers getting more than a token gesture out of the company is looking grim indeed.
