BlockFi is bankrupt, where did it all go wrong?

• BlockFi has become the latest company to file for bankruptcy, citing ‘significant exposure’ to FTX
• He sued FTX to recover Robinhood shares he alleges Bankman-Fried had pledged as collateral
• BlockFi’s bankruptcy was a long time coming, as the company was rescued by a $400 million credit facility from FTX earlier this year
• Regulation just needs to come in space as customers continue to feel pain

Another one biting the dust.

In a move everyone saw coming, BlockFi filed for bankruptcy on Monday.

Court records from the troubled crypto lender reveal it has over 100,000 creditors and blames “significant exposure” to insolvent exchange FTX. This is yet another dark mark on the crypto notebook, which is quickly running out of space.

BlockFi bankruptcy was coming

BlockFi had suspended withdrawals following the collapse of FTX nearly three weeks ago. As investors at Celsius, Voyager Digital and so many other platforms will tell you, it’s usually the straw that breaks the camel’s back. It’s hard to earn customers’ trust when you, you know, don’t let them get their money out.

And so the filing this week is no surprise. BlockFi said it was hoping for a resurgence. He revealed cash of $257 million, which he says is enough to see him through bankruptcy proceedings, allowing him to avoid debtor-in-possession financing.

Call me a cynic, but I don’t see how the company is recovering from this. BlockFi adviser Mark Renzi asserted that BlockFi is “well positioned to move forward despite 2022 being a particularly terrible year for the cryptocurrency industry.”

Hmmm. If that’s what’s in the right place, then I have to take English lessons again. As I said, I don’t see how customers will trust BlockFi with their funds again. Not to mention that glaring big hole in their balance sheet and the small matter of literally filing for bankruptcy.

BlockFi sues FTX

BlockFi is also suing FTX to seize shares of Robinhood that the lender alleges Sam Bankman-Fried pledged as collateral against loans it has now defaulted on. Bankman-Fried bought 7.6% of Robinhood shares earlier this year.

The added legal issue — aside from filing for bankruptcy, just to be clear — just underscores how messy and incestuous this all is. As I wrote when dissecting the next step in crypto, Bankman-Fried had their hands in many pots, and the process of unraveling this debacle won’t be fun.

Much of this has to do with Luna’s collapse earlier this year, which was supposed to be when FTX’s sister trading company, Alameda, called in a lot of loans, after getting caught in the fray itself. contagion. FTX sent client assets from the exchange, with the now-defunct FTT token pledged as collateral. The same token that FTX created, ie.

BlockFi had its own issues amidst this, of course. They were forced to sign a deal with FTX for a $400 million credit facility (I told you – incestuous!) in order to keep the doors open. The deal also gave FTX the right to acquire BlockFi at any time through July 2023.

Ironically, it’s that same white knight – Sam Bankman-Fried – who is now unleashing the latest batch of contagion, having said that’s exactly what he was trying to counter with all his bailouts earlier this year. And this time BlockFi fell.

While creating this coin, I came across the tweet below I made about BlockFi reacting to the Celsius implosion by sending me an email announcing higher returns. I think it’s fair to see some of these companies practicing less than stellar risk management, don’t you think?

What’s next for BlockFi customers?

Unfortunately, customers now face a long wait. Like, a really long wait. Mt Gox, the former exchange that once held 70% of the Bitcoin trading market, went bankrupt in 2014 and customers still haven’t seen a dime.

Hopefully, it won’t be that long, but Chapter 11 isn’t an overnight process. As John Ray III stated in court filings shortly after taking over the management of FTX to guide them through the bankruptcy process, “Never in my career have I seen such a complete failure of corporate controls and such a complete lack of reliable financial reporting as has happened here”.

And it was the same John Ray III who oversaw the Enron bankruptcy, one of the worst cases of bankruptcy in financial history.

It was already obvious, but it is becoming more and more so by the day: the cryptocurrency space needs a complete regulatory overhaul. At this time, a little common sense would also be nice.