US-based cryptocurrency lending and borrowing platform BlockFi, formerly one of the biggest in the cryptocurrency space, filed for Chapter 11 bankruptcy protection on Monday. The company indicated that it hopes to restructure and will continue operations for the time being.
Today, BlockFi filed voluntary cases under Chapter 11 of the U.S. Bankruptcy Code.https://t.co/adaAx6me4r
— BlockFi (@BlockFi) November 28, 2022
The platform, which gives depositors yield on their crypto holdings, had halted withdrawals earlier this month amid uncertainty due to cryptocurrency exchange FTX’s spectacular collapse.
BlockFi Has Over 100K Creditors
According to the company’s bankruptcy filing, BlockFi owes money to at least 100,000 creditors. Its largest creditor is Ankura Trust Company, to which BlockFi owes $730 million in unsecured claims. Other large creditors include West Realm Shires Inc., FTX US’s legal name, to which BlockFi owes $275 million, and the SEC, to which BlockFi owes $30 million.
BlockFi had agreed to pay the SEC and several state regulators a total of $100 million earlier this year as part of a settlement over allegations that its crypto yield product had violated US state and federal laws. The settlement at the time forced BlockFi to register its yield product with the SEC.
BlockFi Bankruptcy Rounds-off Rocky Year
BlockFi’s Monday bankruptcy filing rounds off what has been a rocky year for the cryptocurrency lending platform. After the abrupt collapse of the Luna cryptocurrency ecosystem back in May and the liquidation of an unnamed large client (who many think could have been now-defunct crypto hedge fund Three Arrows Capital), BlockFi had to get a credit line from FTX to survive.
A $250 million agreement soon morphed into a $400 million facility that gave FTX the option to buy BlockFi, should they want.
Yesterday we signed definitive agreements, subject to shareholder approval, with FTX US for:
1. A $400M revolving credit facility which is subordinate to all client funds, and
2. An option to acquire BlockFi at a variable price of up to $240M based on performance triggers.
— Zac Prince (@BlockFiZac) July 1, 2022
That lifeline back in July kept BlockFi ticking over until early November. But earlier this month, a liquidity crisis at FTX resulted in the abrupt collapse of the exchange and threw BlockFi’s credit line into uncertainty. Things culminated with BlockFi eventually being forced into declaring bankruptcy on Monday.
Crypto Credit Contagion Fears Weigh on Sentiment
Cryptocurrency traders remain cautious on Monday as they question how much further the ongoing credit crisis in the space has to go. FTX’s untimely demise has brought Genisis and now BlockFi to their knees. How many more platforms might fall?
And how might the ongoing crisis impact society’s broader perception of crypto, as well as efforts to regulate the space by governing authorities? Current price action suggests that traders/investors deem recent events as 1) likely act as a drag on broader crypto adoption, with consumer confidence in the nascent financial technology knocked, and 2) likely to perhaps result in a more aggressive stance from regulators in key markets like the US.
Bitcoin was last changing hands around $16,200, around 2% lower in the last 24 hours, according to CoinMarketCap. That means the world’s largest cryptocurrency by market capitalization remains around 25% lower than its pre-FTX collapse levels near $21,500. Bitcoin supporters argue that FTX and the ongoing credit crisis in the crypto space have nothing to do with bitcoin.
Bitcoin slides back towards $16K. Source: TradingView
Rather, FTX’s failures are as a result of human error and centralization, while the ongoing credit crisis is as a result of the over-financialization of crypto. Bitcoin is an antidote to both such phenomena, they argue. But, according to the price action, the bears remain in control for now.
Bitcoin traders will be hoping that US economic data and rhetoric from US Federal Reserve members will stoke optimism about a potentially less hawkish policy stance from the Fed in the months ahead. Otherwise, bitcoin’s upside prospects remain somewhat limited.