BlockFi Files for Chapter 11 Bankruptcy After Weeks in Limbo

After leaving its clients hanging for weeks, wondering what was going on behind the scenes at BlockFi, the company has just announced that it and its 8 affiliated debtors are indeed proceeding forward with filing for Chapter 11 bankruptcy proceedings in the United States.

What Happened?

Per BlockFi, this turn of events is the result of its exposure to FTX and various of its affiliated companies.  While disheartening to see another large group of investors negatively impacted by a centralized entity, this move is not surprising given the lack of communication afforded by BlockFi since it opted to halt withdrawals weeks ago – a situation reminiscent of what rival lending platforms Celsius is currently going through.

While the company has not shared exact details of how it found itself to be so exposed to FTX, speculation has run rampant due to the company already being bailed out by FTX.US earlier this year with a hearty credit line.  All we know is that the company has significant exposure to FTX, and cannot continue operating normally until it retrieves its funds tied up with the now defunct exchange.  For now, investors are left wondering just what went wrong.  Were client funds misused?  Where are the holdings meant to be custodied by Gemini?  How much exposure to FTX does BlockFi really have? etc.

These answers should come out in time now that BlockFi has filed for Chapter 11 – a path which BlockFi indicates was chosen in an effort to “…stabilize its business and provide the Company with the opportunity to consummate a comprehensive restructuring transaction that maximizes value for all clients and other stakeholders.”

Assets and Claims

In its filing, various bits of information have been released, shedding light on who will be affected, and the state of BlockFi’s finances.  Overall, we now know that somewhere north of 100,000 creditors have been affected by this development, and that BlockFi is in control of assets valued between $1B and $10B.

The top-50 creditors with the most significant exposure were listed in the filing.  The following are the top five, the type of claim, and what is owed to them by BlockFi.

• Ankura Trust Company, Indenture, ~$730M
• West Realm Shires Inc., Loan, ~$275M
• Unnamed creditor, Client, ~$48.5M
• Securities and Exchange Commission, Settlement, ~$30M
• Unnamed creditor, Client, ~28M

With many already critical of the SEC on its approach towards providing investors with protection and access to fair markets, it should be interesting to see what comes of the ~$30M still owed to the regulator from its past fine.

For the time being, creditors of BlockFi should not expect to retrieve any funds from the platform in the near future.  Not only does this process need to see itself through, its progress is directly linked to FTX and its own Chapter 11 filing.

Moving Forward

Now that Chapter 11 has been filed, BlockFi has shared various steps that it hopes to take which will allow it to continue operating moving forward, navigating what will surely be treacherous water.  Beyond its stated ~$257M cash on hand earmarked to provide liquidity for some its operations, these steps include filing for,

• a ‘Key Employee Rentention Plan’
• approval to continue paying employee wages and benefits
• various cost cutting measures

From the publics perspective, it is hard to see a good outcome from this situation.  Not only does BlockFi has a checkered past in which it has had run-ins with regulators, and various instances of poor practices, the current state of affairs has resulted in the company having completely lost the trust of many.  Much of this stems from the fact that the company continually encouraged users that everything was alright behind the scenes mere hours before halting withdrawals.  Put bluntly, BlockFi knowingly lied about its situation to the masses, giving false hope and assurances to individuals that were about to lose access to significant sums of their own money – a similar move that has recently resulted in criminal investigations into companies like Hodlnaut by local authorities.