BlockFi Files For Chapter 11 Bankruptcy, Why Is The SEC Listed As A Creditor?

Crypto lending company BlockFi filed for chapter 11 bankruptcy protection in the U.S., District of New Jersey. Earlier this year, the Company was impacted by the collapse of the Three Arrows Capital (3AC) hedge fund. A credit line provided by exchange FTX allowed to continue operations, but only for a short time.

Recently, the crypto trading venue also collapsed. Consequently, BlockFi could not maintain its operations and was forced to file for protection in the United States. 

According to a press release, the Company will attempt to recover funds from FTX and other counterparties. This process might take a while as the crypto exchange is undergoing a bankruptcy process. Mark Renzi, financial advisor for BlockFi, said: 

With the collapse of FTX, the BlockFi management team and board of directors immediately took action to protect clients and the Company. From inception, BlockFi has worked to positively shape the cryptocurrency industry and advance the sector. BlockFi looks forward to a transparent process that achieves the best outcome for all clients and other stakeholders.

BlockFi, FTX, And The Crypto Contagion

While BlockFi completes its bankruptcy process, the Company will continue to operate its business, the press release claims. In that sense, the crypto lender will file a series of extra motions with the bankruptcy court, such as the ability to pay employee wages and employee benefits. 

The crypto lender claims to have over $256 million in cash on hand, but withdrawal requests are and will continue during the bankruptcy process. In addition, the Company will implement a strategy to cut down on its expenses and labor costs. The Company announced: 

In parallel with these chapter 11 cases, BlockFi International Ltd. a Bermuda incorporated company, filed a petition with the Supreme Court of Bermuda for the appointment of joint provisional liquidators pursuant to section 161(e) of Bermuda’s Companies Act, 1981 in the near term. BlockFi currently anticipates that client claims will be addressed through the Chapter 11 process.

The U.S. Securities and Exchange Commission (SEC) is listed as a $30 million creditor in the document filed with the court. The Company acquired this obligation when the SEC won a case that ordered BlockFi to pay over $100 million to the regulator. 

The FTX collapse and contagion raised many questions about its ties with Washington and the SEC’s Chair, Gary Gensler. In the wake of these events, many wondered if FTX’s former CEO, Sam Bankman-Fried used clients’ funds to buy off politicians in Washington. 

Moreover, Stuart Alderoty, General Counsel at Ripple, wondered if BlockFi paid the SEC with FTX’s funds. What are the implications for the regulator if the exchange used customer funds to cover for BlockFi? Alderoty said:

Nothing was ever “registered” per the BlockFi/SEC deal. What about the first two payments on the $100M fine? If they were made, did the SEC confirm BlockFi’s ability to pay and/or the source of funds? FTX b/cy shows a $250M loan to BlockFi and now customer funds are blocked. Despite BlockFi ending up intertwined with FTX and customers left holding the bag, the SEC still markets the BlockFi deal as another “win” for regulation by enforcement. Oh, what a tangled web…