What Happened? BlockFi Files for Bankruptcy Amid FTX Crypto Contagion

The effect of FTX downfall continues as BlockFi files for bankruptcy. BitPinas prepares a timeline about the situation.

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BlockFi files for Chapter 11 bankruptcy, weeks after the collapse of FTX, which previously signed a term sheet to provide credit to the embattled crypto lender last June. BlockFi is the latest victim of the latest crypto contagion, this time with FTX at its center.

BlockFi is in the business of letting users earn a yield from cryptocurrencies they deposited in their accounts. 

What Happened to BlockFi and Why is it Collapsing?

FTX Saves BlockFi (June 2022)

Amid crypto winter and the collapse of LUNA and UST last May resulted in the collapse of several firms like Terra and Three Arrows Capital, BlockFi avoided a similar situation after Sam Bankman-Fried’s FTX Exchange extended a $250 million line of credit so the lender can continue paying its obligations. 

A future partnership or acquisition was also on the table for both parties. Sam was hailed the white knight of crypto, with people citing parallels to how J.P. Morgan, the founder of the bank with the same name, “saved” the U.S. stock market from ruin in 1907 by rescuing other banks and lenders.

FTX Collapses (November 2-11 2022)

In the span of three days starting November 2, Sam Bankman-Fried’s crypto empire collapsed after a significant hole in its balance sheet was revealed by crypto publication Coindesk. Much of its money, it was revealed, was composed of its own FTX tokens or FTT. 

It also gave favors to Alameda, a trading firm founded by Bankman-Fried, such as comingling of funds and using customer money from FTX to Alameda, which is in direct violation of FTX’s own terms and conditions.

The unraveling was swift. Binance CEO Changpeng Zhao said it would liquidate all of its FTTs. 

Though Zhao and Bankman-Fried appeared to agree to the acquisition of FTX by Binance, the deal was off the next day.

FTX then filed for bankruptcy on November 11.

BlockFi Pauses Withdrawals (November 11, 2022)

On the same day as FTX filed for bankruptcy, BlockFi paused user withdrawals and limited platform activity. 

“We, like the rest of the world, found out about this situation through Twitter. We are shocked and dismayed by the news regarding FTX and Alameda.”

The firm said it is not able to operate as usual because the capital that FTX would provide became uncertain after the exchange’s implosion.

BlockFi Bankruptcy Proceedings

FTX and Alameda owe BlockFi $671 million on defaulted loans and $355 million in frozen funds. A defaulted loan means the borrower has failed to repay the funds. 

BlockFi also has not yet paid its settlement with the U.S. Securities and Exchange Commission amounting to $100 million. Additionally, it owes $1.3 billion to its largest creditors. 

FTX Contagion Continues

Once the darling of the cryptocurrency industry, allowing users to earn a yield from their idle cryptocurrencies, BlockFi won’t be the last victim of the ongoing “crypto contagion.”

Japanese exchange Liquid Global has halted withdrawals. In 2021, it received a loan worth $120 million from FTX. In February 2022, FTX acquired Liquid’s parent company, Quione. 

Other companies that are affected include Gemini and Genesis, owned by Digital Currency Group, which owns Coindesk, the publication that first exposed the FTX issue.

This article is published on BitPinas: What Happened? BlockFi Files for Bankruptcy Amid FTX Crypto Contagion

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