BlockFi Files For Chapter 11 After FTX Exposure

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Crypto Lender BlockFi Files For Chapter 11 Bankruptcy

Crypto lender BlockFi Inc. is the latest digital asset firm to file for bankruptcy after the collapse of FTX. 

In a statement made Monday, BlockFi stated that it will use the Chapter 11 process to “focus on recovering all obligations owed to BlockFi by its counterparties, including FTX and associated corporate entities.” 

According to the company’s bankruptcy filing, BlockFi’s executives estimate the company has more than 100,000 creditors and between $1 billion and $10 billion in assets and liabilities. The filing further reveals that BlockFi Inc. owes more than $1 billion to three of its largest creditors, and a total of $1.3 billion to its 50 largest creditors. 

New Jersey-based BlockFi, founded by fintech executive turned crypto entrepreneur Zac Prince, said in a bankruptcy filing that its substantial exposure to FTX created a liquidity crisis. 

“Although the debtors’ exposure to FTX is a major cause of this bankruptcy filing, the debtors do not face the myriad issues apparently facing FTX,” said the bankruptcy filing by Mark Rezni, managing director at Berkeley Research group, the proposed financial advisor for BlockFi, “Quite the opposite.” 

BlickFi said the liquidity crisis was due to its exposure to FTX via loans to Alameda, a crypto trading firm affiliated with FTX, as well as cryptocurrencies held on FTX’s platform that became trapped there. BlockFi listed its assets and liabilities as being between $1 billion and $10 billion. 

BlockFi on Monday also sued a holding company for ex-CEO of FTX Sam Bankman-Fried, seeking to recover shares in Robinhood Markets Inc pledged as collateral three weeks ago, before BlockFi and FTX filed for bankruptcy protection. 

Renzi said BlockFi had sold a portion of its crypto assets earlier in November to fund its bankruptcy. Those sales raised $238 million in cash, and BlockFi now has $256.5 million in cash on hand. 

In Monday’s court filing, BlockFi listed FTX as its second-largest creditor, with $275 million owed on a loan extended earlier this year. It said it owes money to more than 100,000 creditors. The company also said in a separate filing it plans to lay off two-thirds of its 292 employees. 

Under a deal signed with FTX in July, BlockFi was to receive a $400 million revolving credit facility while FTX got an option to buy it for up to $240 million. 

BlockFi’s bankruptcy filing also comes after two of BlockFi’s largest competitors, Celsius Network and Voyager Digital, also filed for bankruptcy in July.

Crypto lenders are not required to hold capital or liquidity buffers like traditional lenders, and some found themselves exposed when a shortage of collateral forced them and their customers to shoulder large losses. 

BlockFi’s largest creditor is Ankura Trust, which represents creditors in stressed situations and is owed $729 million. Valar Ventures, a venture capital fund linked to Peter Thiel, owns 19% of BlockFi equity shares. 

BlockFi also listed the U.S. Securities and Exchange Commission as one of its largest creditors, with a $30 million claim. In February, a BlockFi subsidiary agreed to pay $100 million to the SEC and 32 states to settle charges in connection with a retail crypto lending product the company offered to nearly 600,000 investors. 

Bain Capital Ventures and Tiger Global co-led BlockFi’s March 2021 funding round, BlockFi said in a press release issued at the time. 

In a blog post, BlockFi said its Chapter 11 cases will enable the company to stabilize its business and maximize value for all stakeholders. 

“Acting in the best interest of our clients is our top priority and continues to guide our path forward,” BlockFi said. 

In its bankruptcy filing, BlockFi said it had hired Kirkland & Ellis and Haynes & Boone as bankruptcy counsel. 

As of Monday, BlockFi paused withdrawals from its platform. 

In a filing, Renzi said Blockfi intends to seek authority to honor client withdrawal requests from its customer wallet accounts, in which crypto assets are held in custody, However, the company did not disclose plans for how it might treat withdrawal requests from its other products, including interest-bearing accounts. 

“BlockFi clients may ultimately recover a substantial portion of their investments,” Renzi said in the filing.

Crypto Exchange Kraken Settles Iran Sanctions Violations With U.S. Treasury

Crypto exchange Kraken has agreed to pay the U.S. Treasury Department’s Office of Foreign Asset Control (OFAC) more than $362,000 to settle a case involving its potential civil liability for alleged violations of sanctions against Iran. 

Kraken also agreed to invest $100,000 in implementing additional sanctions compliance controls. 

Marco Santori, Chief Legal Officer at Kraken stated, 

“Even before entering into this resolution, Kraken had taken a series of steps to bolster our compliance measures. This includes further strengthening control systems, expanding our compliance team and enhancing training and accountability.” 

According to the OFAC statement, Kraken’s platform processed 826 transactions for users located in Iran between roughly October 2015 to June 2019. 

At the time, Kraken maintained controls intended to prevent users from initially opening an account while in a jurisdiction subject to sanctions, but did not implement IP address blocking based on geolocation across its platform, the statement added. 

In October, the Treasury Department had also fined crypto exchange Bittrex Inc $29 million in fines for “apparent violations” of sanctions on certain countries and anti-money laundering law. 

Chief Legal Officer Marco Santori, in an emailed statement to Reuters, said: 

“Kraken is pleased to have resolved this matter, which we discovered, voluntarily self-reported and swiftly corrected.”

Aave Temporarily Freezes Lending Markets To Fend Off Further Attacks

Decentralized liquidity protocol Aave has temporarily suspended lending markets for 17 tokens in an effort to fend off volatility risks that could lead to taking on bad debt due to future market manipulation attacks. 

The assets included in the list are (YFI), Curve Finance (CRV), 0x (ZRX), Decentraland (MANA), 1inch (1INCH), Basic Attention Token (BAT), Ampleforth (AMPL), DeFi Pulse Index (DPI), renFIL (RENFIL), Maker (MKR), Enjin (DNJ), xSUSHI and five stablecoins: sUSD, GUSD, RAI, USDP, and LUSD. 

Aave’s governance members passed a vote to temporarily freeze these assets because they are considered to be volatile and have low liquidity. With the assets frozen, users cannot take loans on the assets or deposit their assets to the protocol. 

According to the proposal, the aim of the move is to reduce the risk for Aave v2 and promote the eventual migration to v3. The proposal also pointed out the lower risk tolerance of community members at the moment. 

However, the authors of the proposal also highlighted that the next course of action, which may be to either delist or relist the markets, would depend on liquidity and usage levels. 

The governance proposal follows a failed $60 million attack on CRV (Curve) using USD Coin as collateral. The attack was unable to go through because of a wrong calculation of the decentralized protocol’s liquidity levels. 

Nevertheless, contributors within the project worked on the proposal to prevent further exploitation attempts on the protocol. 

Despite the turbulence in the broader crypto market, a decentralized finance (DeFi) protocol was able to raise $10 million in investments form various investors, such as Bitfinex and Ava Labs. Last week, Cosmos-based ecosystem Onomy secured funds to develop its new protocol that combines DeFi and foreign exchange.

Luke Baldwin

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