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Is BlockFi bankrupt, or has it all gone wrong?

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  • BlockFi has become the latest company to file for bankruptcy, citing “significant exposure” to FTX
  • It sued FTX to recover Robinhood shares that, it alleges, Bankman-Fried had pledged as collateral
  • BlockFi’s bankruptcy was a long time coming, as the company had been bailed out by a $400 million line of credit from FTX earlier this year
  • Regulation simply must come to the space while customers continue to feel the pain

Another one bites the dust.

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

Court records from the troubled cryptocurrency lender reveal it has more than 100,000 creditors and blame “significant exposure” to insolvent exchange FTX. It’s another dark mark on the cryptocurrency notebook, which is rapidly running out of space.

BlockFi bankruptcy looming

BlockFi had suspended withdrawals following the collapse of FTX almost three weeks ago. As investors in Celsius, Voyager Digital and so many other platforms will tell you, this is usually the last straw. It’s hard to earn the trust of customers when, you know, you don’t let them take their money out.

So this week’s presentation comes as no surprise. BlockFi said it expected a resurgence. It has disclosed $257 million in cash, which it said is enough to allow it to undergo bankruptcy proceedings, which would allow it to avoid debtor-in-possession financing.

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

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Hmmm. If that’s well positioned, then I need to get back to English classes. As I said, I don’t see how clients will ever trust BlockFi with their funds again. Not to mention that big glaring hole in their balance sheet and the small matter of literally declaring bankruptcy.

BlockFi sues FTX

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

The additional legal problem-apart from the bankruptcy filing, to be clear-simply underscores how messy and incestuous this all is. As I wrote in dissecting the next stage of cryptocurrency, Bankman-Fried had his hands in a lot of bangers, and the process of untangling this debacle will not be fun.

A lot of this has to do with Luna’s collapse earlier this year, which was when FTX’s sister trading company Alameda borrowed heavily, after getting caught in the contagion itself. FTX sent the assets of the exchange’s customers, with the now defunct FTT token pledged as collateral. The same token that created FTX.

BlockFi had its own problems in the midst of this, of course. They were forced to sign an agreement with FTX for a $400 million line of credit (I told you: insincere!) to keep the doors open. The agreement also gave FTX the right to acquire BlockFi at any time through July 2023.

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

In creating this piece, I came across the tweet I made below about BlockFi, which responded 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?

What’s next for BlockFi customers?

Unfortunately, customers are now facing a long wait. A really long wait. Mt Gox, the former exchange that once held 70% of the Bitcoin trading market, went bankrupt in 2014 and customers have yet to see a dime.

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Hopefully it won’t take that long, but Chapter 11 is not an overnight process. As John Ray III said in court filings shortly after taking over 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 absence of reliable financial information. as has occurred here.”

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

It was already obvious, but it is becoming more so every day: the cryptocurrency space needs a complete overhaul of regulation. At this point, a little common sense would also be nice.

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