BlockFi, a crypto loan and borrow platform, filed for Chapter 11 bankruptcy protection on Monday, becoming the latest crypto firm to go under following the rapid collapse of offshore trading venue FTX.
Started in 2017 by Zac Prince and Flori Marquez, BlockFi was one among several crypto companies to introduce lending and borrowing where customers could use cryptocurrencies as collateral.
The practice spelt the end of competitor firms Voyager Digital and Celsius Network earlier this summer as crypto prices plunged. BlockFi faced similar financial woes over the summer, but received an emergency bailout in the form of a $250 million line of credit from FTX, which contained the option for FTX to buy the firm a year later.
“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 Berkley Research Group said in the company's announcement.
BlockFi would not offer further details regarding the events that led up to its bankruptcy outside of what is already publicly available.
BlockFi had previously frozen customer withdrawals on November 10. Four days after halting, it announced it had hired financial restructuring advisors, Berkley Research Group, citing "significant exposure to FTX and associated corporate entities."
The exposure includes obligations owed to BlockFi by Alameda Research, assets held at FTX.com, and undrawn amounts from BlockFi's $250 million credit line with FTX.US. BlockFi has more than 100,000 creditors in addition to estimated assets and liabilities of between $1 billion and $10 billion according to its Chapter 11 filing.
While unsurprising, BlockFi's bankruptcy is no less taxing to crypto investors still reeling from the collapse of FTX earlier this month. Genesis Lending, a larger crypto lending firm, is facing similar financial woes after having paused customer withdrawals two weeks ago.
BlockFi revealed in its Chapter 11 petition that its three largest creditor claims are a $729 million indenture from Ankura Trust, a distressed loan administration company, a $275 million loan from West Realm Shires, the holding company for FTX’s US subsidiary, as well as a $30 million settlement payment to the U.S. Securities and Exchange Commission.
"Thus far, while the FTX collapse has ultimately left the Debtors with no choice but to initiate these chapter 11 cases, I have found the BlockFi management team to be knowledgeable and experienced, diligent, responsible stewards of their stakeholders’ assets," Berkley Research Group's Renzi said in the company's "declaration" court document.
Renzi stated in the declaration that BlockFi's bankruptcy filing was not due to a lack of internal oversight, but rather was the result of a "liquidity shortage" started in the first two weeks of November wherein, after first requesting more credit from FTX, its affiliate company Alameda defaulted on approximately $680 million of collateralized loan obligations to BlockFi.
Following BlockFi's filing, bitcoin prices remained near $16,200, off about 2% on Monday.
BlockFi's lending model falls apart
A fairly common practice among investment banks in traditional finance, BlockFi's lending model originally allowed bitcoin holders to make use of their accumulated wealth from its price appreciation without having to sell their holdings.
The concept also meant customers borrowing crypto weren’t subject to the same credit check requirements, while lenders would not have to realize capital gains for taxes.
In 2019, BlockFi introduced crypto bearing interest accounts where customers could earn a variable interest rate on their bitcoin starting at 6.2%. By April 23, 2021, BlockFi's crypto bearing interest accounts had expanded to ten other cryptocurrencies.
The following August, BlockFi closed a $500 million series E fundraising round vaulting its post-money valuation to $3.8 billion, according to data from Crunchbase. At the same time, its headcount swelled to 818 employees.
Yet the inherent volatility in cryptocurrencies also meant the margin requirements for borrow positions could fluctuate rapidly, in some cases leading to both customers and BlockFi, as a counterparty, losing large amounts of money through liquidations during market selloffs.
At the beginning of November the company's headcount had been halved to 400 employees, according to a BlockFi spokesperson. As part of its "first day" bankruptcy motions, the company is requesting paying employee wages under Chapter 11. It has also initiated a plan to reduce expenses by cutting its workforce.
The company said Monday it has ??$256.9 million in cash to support its operations going forward in bankruptcy proceedings.
According to BlockFi's website, notable equity backers have included Tiger Global, Jump Capital, Winklevoss Capital, Peter Thiel, Galaxy Digital, Northwestern University alumni Ventures fund Purple Arch Ventures, Paradigm, Morgan Creek Digital, and CMS Holdings.
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David Hollerith is a senior reporter at Yahoo Finance covering the cryptocurrency and stock markets. Follow him on Twitter at @DsHollers
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