BlockFi Files for Bankruptcy. What It Means for Investors

BlockFi blames significant exposure to FTX for bankruptcy filing.

Beleaguered crypto lender BlockFi is the latest platform to be pulled under following the collapse of crypto titan, FTX. BlockFi announced today (Monday) that it would file for chapter 11 bankruptcy, explaining it had "significant exposure to FTX." 

BlockFi ran into trouble in the summer following the failure of crypto hedge fund Three Arrows Capital. At that time, FTX stepped in and offered a $250 million line of credit to help the company survive. Unfortunately, it is now clear that FTX wasn't in a position to bail out other crypto companies and likely didn't even have the internal systems in place to sustain itself.

BlockFi's bankruptcy filing

In a statement, BlockFi said it and eight of its affiliates had commenced voluntary proceedings in the New Jersey bankruptcy court in order to stabilize its business and restructure in a way that "maximizes value for all clients and other stakeholders." 

BlockFi says it has $256.9 million in cash on hand, which will be used to provide liquidity during its restructuring process. Chapter 11 is sometimes known as a "reorganization" bankruptcy as it allows a business to continue operations as it works out a way to pay creditors.

According to its bankruptcy filing, BlockFi's assets and liabilities both total between $1 billion and $10 billion, and it has more than 100,000 creditors. The company said it would "focus on recovering all obligations owed to BlockFi by its counterparties, including FTX and associated corporate entities." However, this also means that FTX's own bankruptcy process could delay recoveries of BlockFi funds.

What it means for investors

Crypto prices slipped slightly following BlockFi's news. According to CoinMarketCap data, Bitcoin (BTC), almost touched the $16,000 mark again. The lead crypto had been trading at around $16,500 for a few days but it will be difficult for prices to gain any kind of momentum until the fallout from FTX has fully passed.

Crypto investors would be wise to brace themselves for further contagion. Other crypto platforms have already fallen and we don't know how many more will be impacted. Several top crypto exchanges have attempted to reassure customers by issuing proof of reserves, which is a start. But that's only part of the story: proof of reserves doesn't mean much if we don't also know how much money these firms owe.

There's a strong possibility the failure of such a large player could result in much stricter regulation for crypto exchanges. We don't know what shape increased regulation will take. It could mean, for example, that stablecoins have to be more transparent about their reserves. It might require crypto exchanges to follow stricter rules. And it might end up with cryptocurrencies being treated as securities, with much more oversight about the way they are traded and communicated. 

In the long run, some or all of these things may well strengthen the industry and provide additional investor confidence. Confidence is something the industry is seriously missing right now. But in the short term, it will likely cause further volatility. The FTX debacle shows that we don't know what is going on behind the scenes at many crypto platforms. Increased oversight could reveal that other platforms aren't taking care of customer funds in the way we might hope. Right now, there's a lot we don't know.

What it means for BlockFi customers

If you're a BlockFi customer, you may struggle to get your money back. In a FAQ document for clients, BlockFi says "clients' claims will be addressed through the chapter 11 process." You can find more information about the process and your specific situation by contacting the company's claims agent, Kroll.

BlockFi suggests you follow Twitter and the company blog for the latest information. While it asks clients not to deposit more money, it does advise them to keep their accounts open. It also says "rumors that a majority of BlockFi assets are held at FTX are false." 

Finally, if you hold a loan with BlockFi, the company has put it into administrative forbearance. You will not be charged interest on the loan, and no late fees will be charged. If your loan becomes delinquent, it will not be reported as such to the credit bureaus. U.S. customers may receive an automated email from Scratch notifying them of delinquency. BlockFi says they can disregard this email.

Bottom line

The failure of a crypto platform -- or any institution that holds your money -- is extremely worrying and disconcerting. Crypto prices are volatile enough without dealing with the risk that your funds could be lost in a platform failure. One way that crypto investors can protect themselves is to keep their assets in their own non-custodial wallet. 

A crypto wallet may not carry the same earning benefits as a platform like BlockFi was able to offer, and there are risks associated with becoming your own bank. But during what are very turbulent times in crypto, it may mean you can avoid losing your assets due to the failure of an exchange or crypto lending platform.