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Crypto company BlockFi declares bankruptcy in the first big aftershock of FTX's fall
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Updated November 28, 2022 at 1:20 PM ET
Another crypto company has fallen, as contagion from the collapse of cryptocurrency exchange FTX spreads across the industry: BlockFi says it has filed for bankruptcy.
Lender BlockFi was one of a handful of companies FTX bailed out in recent months, and its prospects worsened considerably as FTX imploded.
A little more than two weeks ago, the once mighty crypto giant FTX - founded by Sam Bankman-Fried to bring everyday people into the opaque world of virtual currencies - filed for bankruptcy. In the days since, the crypto industry, Wall Street, and even federal regulators have been on the outlook for the next domino to fall, wondering if the end of crypto is in sight or if wider financial stability is under threat.
Announcing its plans to file for Chapter 11 reorganization in New Jersey, where the company is based, BlockFi noted FTX's own bankruptcy proceedings will lead to delays.
"Rest assured, we will continue to work on recovering all obligations owed to BlockFi as promptly as practicable," the company said in a letter to customers.
BlockFi had halted withdrawals and asked its customers not to make any deposits. The company said on Monday that activities on its platform continue to be "paused at this time."
One of the country's three major ratings agencies, Fitch Ratings, said the bankruptcy filing raises alarms.
BlockFi's restructuring underscores "significant" risks of contagion within the "crypto ecosystem," as well as potential deficiencies in how the companies manage risks, said Monsur Husain, a senior director at the agency.
BlockFi has close ties to FTX and the scrutiny of regulators
Almost every area of the industry has been suffering through a "crypto winter" this year. The value of bitcoin, the best known virtual currency, is down about 65%.
But BlockFi was especially at risk of collapsing in recent days because it has "significant exposure to FTX and associated corporate entities," as the company's co-founders, CEO Zac Prince and COO Flori Marquez, put it in a letter to customers two weeks ago.
"We are deeply saddened to see the devastation that is cascading across an industry that we love and believe in, touching the lives of so many people," they wrote.
During the summer, FTX agreed to provide BlockFi with a $400 million revolving credit facility, to use as a backstop, in exchange for the option to buy the company for as much as $240 million.
"Ultimately, we found a great partner in FTX US, who shares our commitment to clients," Prince and Marquez said at the time.
BlockFi had blamed its predicament then on "crypto market volatility" and a broader market downturn.
It was further hurt when another crypto lending platform, Celsius, filed for bankruptcy in June. While BlockFi said it didn't have any direct exposure to the competitor, it still saw an uptick in customer withdrawals. Shortly thereafter, BlockFi suffered about $80 million in losses when the crypto hedge fund Three Arrows Capital collapsed.
And in June, BlockFi announced it was cutting its staff by about 20%.
But BlockFi's problems go beyond market or macroeconomic conditions.
Earlier this month, California's Department of Financial Protection and Innovation temporarily suspended BlockFi's license to make and broker loans for 30 days, pending investigation.
The company had already settled charges with the top regulator for Wall Street, the Securities and Exchange Commission, for $50 million, and agreed to pay an additional $50 million fine to more than 30 state regulators in February.
The SEC said BlockFi failed to register its crypto lending product with the commission and underplayed the the risks it was waking by making "a false and misleading statement for more than two years on its website concerning the level of risk in its portfolio and lending activity."
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