BlockFi Tells US Bankruptcy Court It’s ‘The Antithesis of FTX’

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BlockFi, the first direct victim of the collapse of crypto exchange FTX, told a US bankruptcy judge on Tuesday that the US cryptocurrency lender was « the antithesis of FTX » and would seek to return client funds as quickly as possible.

BlockFi filed for Chapter 11 protection on Monday, citing FTX’s collapse and volatility in crypto markets. Earlier in November, BlockFi suspended withdrawals from its platform amid uncertainty over the stability of FTX.

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BlockFi attorney Joshua Sussberg went to great lengths to steer BlockFi away from FTX during the company’s first bankruptcy hearing in Trenton, New Jersey. While detailing the companies’ complex financial relationship, Sussberg pointed out that BlockFi did not face the myriad problems plaguing FTX, which spectacularly imploded earlier this month, sparking contagion fears in the industry.

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FTX’s bankruptcy filings revealed missing assets and a complete failure of corporate controls – while BlockFi had mature and consistent leadership, hired the right experts, and implemented the correct procedures and protocols, a Sussberg said.

BlockFi was « shocked and dismayed » to learn of FTX’s mismanagement, Sussberg told U.S. Judge Michael Kaplan.

While giving Kaplan an overview of BlockFi’s history, Sussberg described the myriad ways the company and FTX were entangled.

BlockFi had lent $680 million to FTX-affiliated hedge fund Alameda Research as part of BlockFi’s broader lending activity before the crypto crash in May.

After this market turmoil caused BlockFi borrower Three Arrows Capital to collapse and large customer withdrawals, BlockFi secured a $400 million credit facility from FTX in July to keep it afloat, which included an option for FTX to purchase it at a later date.

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Sussberg said Alameda defaulted on its $680 million BlockFi loan and BlockFi owed FTX $275 million following FTX’s bailout in July.

BlockFi also used FTX’s platform to trade cryptocurrencies, and BlockFi had $355 million in crypto locked up following FTX’s bankruptcy.

Sussberg said Tuesday that BlockFi intends to seek a court ruling allowing BlockFi Wallet program customers to withdraw their funds during the bankruptcy case if they choose.

« If it’s in your wallet, it stays in your wallet, » Sussberg said.

BlockFi’s Wallet program was created in response to regulatory investigations into the company’s interest-bearing accounts, which the U.S. Securities and Exchange Commission determined were unregistered securities offerings. To resolve these investigations, BlockFi stopped offering interest-bearing accounts to US customers, created the Wallet program for new US customers, and agreed to pay a record $100 million fine.

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During Tuesday’s hearing, Kaplan allowed BlockFi to continue paying employees, maintaining bank accounts and taking other steps necessary to continue day-to-day operations during its bankruptcy filing.

Kaplan also allowed BlockFi to remove the customers’ names and email addresses from court documents for now, saying it did not have enough information to make a final decision on whether or not to release the names. Kaplan will make a final decision at a later date, after weighing privacy concerns against the bankruptcy court’s transparency requirements.

In a court filing Monday, BlockFi said it owed money to more than 100,000 creditors. BlockFi has listed its assets and liabilities between $1 billion and $10 billion. The company sold some of its crypto assets earlier in November to fund its bankruptcy, and it went bankrupt with $256.5 million in cash.

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BlockFi has proposed an initial restructuring plan that offers two paths out of bankruptcy. Sussberg acknowledged on Tuesday that the plan had “many blanks,” but said it demonstrated BlockFi’s commitment to act quickly.

“We want to move as fast as possible to bring value back to our customers,” Sussberg said.

His Chapter 11 plan calls for BlockFi Wallet customers to be fully reimbursed and other account holders and creditors to receive a mix of cryptocurrency, cash, and new equity.

The plan also includes an option to sell the business.

(Reporting by Dietrich Knauth in New York and Noor Zainab Hussain in Bengaluru Editing by Alexia Garamfalvi, Anna Driver and Matthew Lewis)