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BlockFi Files for Bankruptcy as FTX Fallout Spreads

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BlockFi, a cryptocurrency lender that targeted unusual investors anticipating a chunk of the crypto mania, filed for bankruptcy on Monday, felled by its financial ties to FTX, the embattled exchange whose recent downfall has shaken the crypto industry to its core.

Based in Jersey City, N.J., BlockFi marketed itself primarily to small investors, offering them loans backed by cryptocurrency in minutes without credit checks, in addition to accounts that paid high interest on crypto deposits. As of last yr, the lender claimed to have greater than 450,000 retail clients.

On Monday, BlockFi, which was founded in 2017, filed for Chapter 11 protection in Latest Jersey. Its implosion is the most recent example of an industry built on shaky foundations, with corporations so intertwined that a single wobble can unleash financial chaos.

BlockFi isn’t the primary crypto lender to file for bankruptcy. In July, two of its rivals, Celsius Network and Voyager Digital, collapsed inside per week of one another. They were struggling to right themselves after a market panic within the spring, when the worth of many high-profile cryptocurrencies plummeted. Bitcoin alone fell 20 percent in per week.

BlockFi had been reeling since then. To stabilize itself, the lender struck a cope with FTX in June, which was seen as a security net on the time given the exchange’s credibility and dominance within the crypto industry. FTX agreed to provide the corporate with a $400 million credit line — essentially a loan BlockFi could tap as needed.

The sudden collapse of the crypto exchange has left the industry stunned.

  • A Spectacular Rise and Fall: Who’s Sam Bankman-Fried and the way did he change into the face of crypto? The Day by day charted the spectacular rise and fall of the person behind FTX.
  • A Symbiotic Relationship: Mr. Bankman-Fried’s built FTX partly to assist the trading business of Alameda Research, his first company. The ties between the 2 entities at the moment are coming under scrutiny.
  • Missing Assets: Lawyers for FTX said a considerable amount of the corporate’s assets had either been stolen or were missing, casting doubt on the chances of recovering billions of dollars in crypto that customers lost.
  • A Bid for Influence: ​​In only three years, Mr. Bankman-Fried built an enormous operation to woo politicians, regulators and nonprofits to support his crypto goals. Here’s how.

In announcing the funding, Zac Prince, the chief executive of BlockFi, said it would offer “access to capital that further bolsters our balance sheet.” The deal also gave FTX the choice to purchase BlockFi.

BlockFi subsequently borrowed $275 million from a subsidiary of FTX, based on its bankruptcy filings. That financial entanglement meant that when FTX toppled and was forced to file for bankruptcy amid revelations of corporate missteps and suspicious management, BlockFi began to struggle, too.

Just a few days after the exchange collapsed, BlockFi told customers that they couldn’t withdraw their deposits since it had “significant exposure” to FTX, including additional funds the corporate had hoped to attract on under the agreement and other assets held on the FTX platform.

In its filing on Monday, BlockFi said it had about $257 million in money available to assist support its business through the bankruptcy. The corporate said in court filings it had greater than 100,000 creditors, in addition to $10 billion in assets and liabilities. It also said it would scale back expenses considerably, including labor costs. It employed 850 people as of last yr.

BlockFi also said it could concentrate on recovering all obligations owed to the corporate, including those by FTX. Nonetheless, it warned of delays in recovering assets from FTX given the exchange’s bankruptcy.

John J. Ray III, the brand new chief executive of FTX, who previously led Enron during its bankruptcy, has called the company dysfunction at FTX “unprecedented.” Legal experts say it could take years to unwind and recuperate assets.

Regulators had already been scrutinizing BlockFi. In February, the Securities and Exchange Commission reached a $100 million settlement with the corporate’s lending arm for offering loans without registering them as securities, and for not registering itself as an investment company. The S.E.C. also found BlockFi made false and misleading statements concerning the level of risk in its loan portfolio and lending activity.

BlockFi still owes the S.E.C. $30 million, based on its bankruptcy filing, making the nation’s top securities cop its fourth-largest creditor. It owes $275 million to West Realm Shires, the parent company of FTX’s U.S. exchange and BlockFi’s second-largest creditor. Its top creditor, at about $729 million, is Ankura Trust Company, which focuses on managing loans for distressed corporations.

In line with documents filed with the bankruptcy court, Valar Ventures, which is backed partly by the tech mogul Peter Thiel, owns 19 percent of BlockFi. A spokesman for Mr. Thiel didn’t immediately reply to a request for comment.

“From inception, BlockFi has worked to positively shape the cryptocurrency industry and advance the sector,” said Mark Renzi of Berkeley Research Group, a financial adviser to the corporate. “BlockFi looks forward to a transparent process that achieves the most effective consequence for all clients and other stakeholders.”

BlockFi’s other bankruptcy advisers include the law firm Haynes and Boone, investment bank Moelis & Company and strategic adviser C Street Advisory Group.

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