BlockFi, a cryptocurrency lender that targeted ordinary investors eager for a piece 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, New Jersey, BlockFi marketed itself primarily to small investors, offering them loans backed by cryptocurrency in minutes without credit checks, as well as accounts that paid high interest on crypto deposits. As of last year, the lender claimed to have more than 450,000 retail clients.
On Monday, BlockFi, which was founded in 2017, filed for Chapter 11 protection in New Jersey. Its implosion is the latest example of an industry built on shaky foundations, with companies so intertwined that a single wobble can unleash financial chaos.
BlockFi isn’t the first crypto lender to file for bankruptcy. In July, two of its rivals, Celsius Network and Voyager Digital, collapsed within a week of each other. They were struggling to right themselves after a market panic in the spring, when the value of many high-profile cryptocurrencies plummeted. Bitcoin alone fell 20% in a week.
BlockFi had been reeling since then. To stabilize itself, the lender struck a deal with FTX in June, which was seen as a safety net at the time given the exchange’s credibility and dominance in the crypto industry. FTX agreed to provide the company with a $400 million credit line — essentially a loan BlockFi could tap as needed.
In announcing the funding, Zac Prince, the chief executive of BlockFi, said it would provide “access to capital that further bolsters our balance sheet.” The deal also gave FTX the option to buy BlockFi.
BlockFi subsequently borrowed $275 million from a subsidiary of FTX, according to 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.
A few days after the exchange collapsed, BlockFi told customers that they couldn’t withdraw their deposits because it had “significant exposure” to FTX, including additional funds the company had hoped to draw 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 cash on hand to help support its business through the bankruptcy. The company said in court filings it had more than 100,000 creditors, as well as $10 billion in assets and liabilities. It also said it would reduce expenses considerably, including labor costs. It employed 850 people as of last year.
BlockFi also said it would focus on recovering all obligations owed to the company, including those by FTX. However, it warned of delays in recovering assets from FTX given the exchange’s bankruptcy. John J. Ray III, the new chief executive of FTX, who previously led Enron during its bankruptcy, has called the corporate dysfunction at FTX “unprecedented.” Legal experts say it could take years to unwind and recover assets.
Regulators had already been scrutinizing BlockFi. In February, the Securities and Exchange Commission reached a $100 million settlement with the company’s lending arm for offering loans without registering them as securities, and for not registering itself as an investment company. The SEC also found BlockFi made false and misleading statements about the level of risk in its loan portfolio and lending activity.
BlockFi still owes the SEC $30 million, according to 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 Co., which specializes in managing loans for distressed companies.
According to documents filed with the bankruptcy court, Valar Ventures, which is backed partly by tech mogul Peter Thiel, owns 19% of BlockFi. A spokesperson for Thiel did not immediately respond 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 company. “BlockFi looks forward to a transparent process that achieves the best outcome for all clients and other stakeholders.”
BlockFi’s other bankruptcy advisers include the law firm Haynes and Boone, investment bank Moelis & Co. and strategic adviser C Street Advisory Group.