When the cryptocurrency bank BlockFi was in trouble last summer, it found one would-be savior willing to help: Sam Bankman-Fried, the young FTX chief executive.
Now BlockFi has been made weak. And Bankman-Fried is the reason.
The once-hot lender on Monday filed for Chapter 11 bankruptcy protection.
“With the collapse of FTX, the BlockFi management team and board of directors immediately took action to protect clients and the Company,” Mark Renzi of Berkeley Research Group, which is advising the company, said in a statement. “From inception, BlockFi has worked to positively shape the cryptocurrency industry and advance the sector. BlockFi looks forward to a transparent process that achieves the best outcome for all clients and other stakeholders.”
At least 100,000 creditors are owed money by BlockFi, which listed liabilities and assets between $1 billion and $10 billion, according to the bankruptcy filing. The company has said in the past that it had 450,000 retail clients, but that number has not been vetted by outside sources.
The company filed in U.S. Bankruptcy Court for the District of New Jersey, where it is based. The firm also has an international subsidiary in Bermuda that filed for bankruptcy there on Monday.
The news represents the latest crypto collapse in a year filled with them, dating back to fellow lender Celsius Network, coin project Terraform Labs and hedge fund 3AC this year. And it extends the shadow cast by FTX, whose own bankruptcy filing is expected to continue darkening the crypto industry.
The fates of BlockFi and FTX had been tied together at least since June, when a cratering of cryptocurrency values led BlockFi — whose services include taking customer deposits, issuing loans and offering a credit card — to seek help from FTX. But after FTX ran into liquidity issues this month, BlockFi paused customer withdrawals, saying it “was not able to operate business as usual.”
Shortly after, BlockFi said it had “significant exposure to FTX and associated corporate entities,” including money owed it by Bankman-Fried’s trading firm Alameda and assets on FTX.com that had been frozen. The five-year-old BlockFi also had been relying on money from the $400 million loan, which was set up as a credit facility and had not been fully drawn.
“While we will continue to work on recovering all obligations owed to BlockFi, we expect that the recovery of the obligations owed to us by FTX will be delayed as FTX works through the bankruptcy process,” it said.
Retail investors have already been feeling the pinch.
Maximillian Kavaljian, a 26-year-old investment professional from Northern Virginia, told The Washington Post that he had deposited what he said at one time was tens of thousands of dollars’ worth of crypto with BlockFi, transferring it from Coinbase. He was attracted, he said, by BlockFi’s promise of 9 percent returns as well as a credit card that the company offered.
His money is now inaccessible.
“When everything happened in the summer and FTX stepped in, I thought, ‘Okay, BlockFi is having some trouble, but everything is going to be fine because you have one of the biggest crypto platforms out there helping out with the balance sheet,’ ” he said Monday. “It turns out that it’s not fine — that they can just take your money if things get bad.”
Among the large unsecured creditors listed in the bankruptcy filing is the Securities and Exchange Commission, which is owed $30 million, according to the filing. In February, the SEC and BlockFi reached a settlement in which the company agreed to pay $50 million to the agency over failing to register its products as securities and an additional $50 million to states over the same alleged violations.
The largest unsecured creditor, according to the filing, is Ankura Trust Company, which is owed $729 million.
As part of the proceedings, BlockFi also sued an FTX holding company, Emergent Fidelity Technologies, which BlockFi said had pledged to it an unspecified collateral obligation in early November before FTX filed for bankruptcy. The Financial Times later reported that the collateral sought is Bankman-Fried’s share of digital stock-trading platform Robinhood; the fallen mogul owns 7.6 percent of that company.
BlockFi once flew high. Launched in 2017, the company intensified its fundraising efforts in late 2019 and early 2020, eventually raising what some estimates pegged as nearly $1 billion from backers that included Peter Thiel, hedge fund Morgan Creek Capital and the Winklevoss twins. Its employee ranks had swelled to 850 — nearly triple the number of FTX — and it had ambitiously expanded to Asia. By offering yields up to as high as 10 percent, the company attracted a devoted depositor base.
But plunging crypto values in the spring after the collapse of Terraform Labs put BlockFi in a cash crunch, leading to the FTX loan. In return for lending BlockFi up to $400 million, FTX secured the right to one day buy BlockFi at a price no higher than $240 million.
At the time, BlockFi chief executive Zac Prince said the move would provide long-term security customers could rely on. “Today’s landmark announcement reinforces the commitment that BlockFi has to serving its clients and ensuring their funds are safeguarded,” he said.
On Monday, that confidence was shaken. While the full scope of clients and investors has yet to be revealed, the bankruptcy will affect a large number: The filing noted that 50 parties are owed at least $1 million.