What is BlockFi? How did he go bankrupt?

What is BlockFi?

Not long ago, the BlockFi bankruptcy was in the headlines. However, in this sample bankruptcy file, not many people explained or explained the reason for the bankruptcy and the structure of Blockfi, maybe even interested in this side of the business. Whereas, BlockFi is a true case study bankruptcy example that needs to be studied and taken as an example. In this article, we’ll cover why and how BlockFi went bankrupt, its effects, and why it’s an important example.

Let’s start by getting to know BlockFi a little bit. BlockFi was founded in October 2017 by Zac Prince and Flori Marquez with a store opening in Jersey City, New Jersey. Later, BlockFi expanded to New York, Singapore, Poland and Argentina. The main purpose and difference was to provide credit services to the cryptocurrency market. The company’s primary mission was to redesign and progressively expand access to banking resources in communities where traditional banking services could or may not be served. Thus, since its inception, BlockFi has offered 13 digital assets for purchase and several useful products. In a short time it has grown into a global company with more than 800 employees.

How Does BlockFi Work?

BlockFi started offering its first service in 2018. This product/service was quite innovative. In this first product/service, BlockFi offered customers US dollar loans backed by cryptocurrencies. In short, customers could deposit BTC or ETH, i.e. provide crypto collateral, and receive fiat loans in return. Note that the first venture capital money started coming to BlockFi in 2018.

How BlockFi Capital and Financing Started

BlockFi raised 1.55 million USD in February 2018. In July 2018, it managed to raise $52.5 million in a funding round led by Mike Novogratz’s Galaxy Digital. At the end of 2018, BlockFi had raised another $4 million by issuing convertible bonds, of which Akuna Capital was the main buyer. The firm’s next big cash injection came in August 2019, when BlockFi raised $18.3 million in Peter Thiel’s Series A funding round led by Valar Ventures. Series B and Series C funding rounds followed. In 2020, BlockFi raised a total of $80 million. All this seems sufficient to explain and understand how and from which sources BlockFi raises capital.

Reason for BlockFi to Come Up

However, BlockFi came to the fore not with successful investment rounds or innovative financing solutions, but with its bankruptcy. After the bankruptcy of FTX, the events that took place in the crypto world are truly remarkable. BlockFi had stopped withdrawals from its platform as part of the FTX process. It is obvious that the collapse of FTX significantly negatively affected BlockFi.

On November 28, BlockFi filed for chapter 11 bankruptcy (Chapter 11 Bankrupcy). Chapter 11 of the United States Bankruptcy Code is often referred to as “restructuring” bankruptcy (1). Usually, the debtor remains “possessed”, has the powers and duties of a trustee, can continue to run his business, and can borrow new money with court approval. A restructuring plan is proposed, affected creditors can vote on the plan and can be approved by the court if the plan receives the required votes and meets certain legal requirements.

How BlockFi Crashed?

According to the documents provided, BlockFi has more than 100,000 creditors, including the US Securities and Exchange Commission (SEC) are also included. As shown above, how did a company that received this financing and was on the rise experience a decline, how did it go bankrupt in 5 years?

In early 2021, BlockFi registered its own Bitcoin Fund with the SEC. In November of the same year, he applied for approval for the spot Bitcoin Exchange Traded Fund. After that, everything was going well in 2021, but slowly things started to get messy. First, the New Jersey Bureau of Securities and New Jersey’s financial regulator claimed that BlockFi’s interest accounts were an unregistered sale of securities. Then, one by one, complaints and notifications came from Alabama, Texas, Vermont and Kentucky. Just before the bankruptcy, Kentucky ordered BlockFi to stop recording new interest accounts.

For these reasons, BlockFi started 2022 badly. In February, BlockFi settled and registered with the SEC for $100 million due to its high-yield lending product. However, from mid-February, it stopped offering interest accounts to new US customers, preventing existing US customers from adding more funds to their accounts. SEC Chairman Gary Gensler said this compromise demonstrates that crypto markets must comply with time-tested securities laws.

In June, BlockFi saw a one-third drop in value. At the end of the month, $1.8 billion in open loans and $600 million in risk were reported for BlockFi. BlockFi had made large loans to major crypto hedge fund Three Arrows Capital, which officially filed for bankruptcy protection on July 1. Three Arrows has been hit hard by the collapsed stablecoin ecosystem Terra. According to reports, BlockFi liquidated the hedge fund’s collateral prior to its bankruptcy. It was not a good omen that BitCoin fell below $20,000, and BlockFi’s main competitors filed for bankruptcy protection. In distress, BlockFi received a $400 million loan from FTX. During this period, FTX almost bought BlockFi.

BlockFi needed FTX’s credit to survive, but unfortunately in November, FTX completely collapsed and went bankrupt. On November 11, California’s financial regulator revoked BlockFi’s lending license. On top of that, BlockFi inevitably prepared to file for bankruptcy. It formally applied for protection under section 11 on November 28 and was included in the section 11 configuration, outstripping more than 100,000 of its creditors. At the bankruptcy hearing, it was dramatically revealed that BlockFi held $355 million in crypto in FTX.

Conclusion

BlockFi’s experience is an example that clearly demonstrates that innovative finance must carefully construct and manage its relationship with traditional financial instruments and institutions. Again, the investment, credit and collateral relations between blockchain-based financial enterprises cause a corruption in one of them to affect the others. Today, FTX, BlockFi bankruptcy investigations and investigations are still going on even after a long time. Just like the XRP vs. Ripple lawsuit that has been going on for years and many others. It is ironic that these financial technology models, which are innovative on one side, are subjected to traditional company restructuring and bankruptcy procedures on the other. With this aspect, BlockFi is a unique example that tells us that a financial technology startup that does not have a bad day scenario, that is, a technological solution, exit scenario or a balanced and harmless collapse plan even in bad days, should be viewed with caution.

Resources:

1. Mete Tevetoğlu & Okan Gündüz, Business Reorganization in America Bankruptcy Code, Maltepe University Faculty of Law Journal, 2006/2, 2006.

2. BlockFi’s Rise and Fall: A Timeline by Robert Stevens, 1 December 2022, CoinDesk, https://l24.im/gQu3Xhx (Accessed 11.04.2023 )

3. Crypto Lender BlockFi Files for Bankruptcy as FTX Fallout Spreads, Lauren Hirsch, David Yaffe-Bellany and Ephrat Livni, 28 Nov 2022 https://l24.im/K2VcL6.

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