How FTX ‘death spiral’ spelled doom for BlockFi, according to the filing

The BlockFi logo on a smartphone lined up in the Brooklyn borough of New York, on Thursday, November 17, 2022.

Gabby Jones| Bloomberg | Getty Images

There was supposedly one man who could save crypto: Sam Bankman-Fried. The former ftx The CEO bailed out and took over crypto companies as cryptocurrency markets wilted from Terra’s spring crash. In October, FTX won the bidding war for the bankrupt crypto company Traveler Digital in a very advantageous deal.

With the collapse of FTX, the companies that Bankman-Fried bailed out are now in a precarious state. Voyager put itself up for auction again last week. Today, BlockFi filed for bankruptcy in New Jersey, following weeks of speculation that the FTX collapse had fatally crippled the company.

The FTX “death spiral,” as BlockFi advisor Mark Renzi put it, has now spread to another crypto entity. BlockFi’s bankruptcy has been expected for some time, but in a detailed 41-page filing, Renzi shows creditors, investors and the court his perspective at the helm of BlockFi.

According to Renzi, exposure to two successive hedge fund failures, the FTX bailout, and broader market uncertainty all conspired to force BlockFi into bankruptcy.

Renzi is keen to underline that from his point of view, BlockFi is not “facing the myriad of issues that FTX apparently faces.” Renzi pointed to a $30 million settlement with the SEC and the company’s corporate governance and risk management protocols, writing that BlockFi is “well positioned to move forward, despite the fact that 2022 has been a uniquely terrible year for the cryptocurrency industry.”

The “problems” Renzi refers to could include FTX’s widely publicized lack of financial, risk, anti-money laundering (AML) or audit systems. In a lawsuit, newly appointed FTX CEO John Ray said he had never seen “such a complete failure of corporate controls” as in FTX.

Indeed, Renzi is keen to underline the differences between BlockFi and FTX, indeed stating that FTX’s intervention in the summer of 2022 ultimately worsened BlockFi’s results. Renzi is a general manager at Berkeley Research Group (BRG), which has engaged BlockFi as its financial advisor for their Chapter 11 litigation.

Both BRG and Kirkland & Ellis, BlockFi’s legal counsel, have experience in crypto bankruptcy. Kirkland and BRG both represented Voyager in the failed auction to FTX. Both firms have already collected millions in fees from BlockFi in preparation for bankruptcy, according to court documents.

Similar to the Voyager and Celsius Network bankruptcies, Renzi points to broader turbulence in the cryptocurrency markets, accelerated by the collapse of crypto hedge fund Three Arrows Capital, as the driving force behind BlockFi’s liquidity crisis.

BlockFi, like Celsius and Voyager, offered exceptionally high interest rates on clients’ crypto accounts. All three companies were able to do this thanks to cryptolending – lending customer cryptocurrencies to trading firms in exchange for high interest and collateral. Three Arrows, or 3AC, was “one of BlockFi’s largest borrower clients,” Renzi said in a lawsuit, and the hedge fund’s bankruptcy forced BlockFi to seek outside funding.

Another round failed for BlockFi. Traditional outside investors were put off by “unfavorable” market conditions, Renzi said in a filing, forcing them to turn to FTX to recoup customer withdrawals. Unlike Voyager or Celsius, BlockFi had not stopped customer withdrawals at the time.

FTX collected and delivered a package of loans up to $400 million. In return, FTX reserves the right to acquire BlockFi from July 2023, the court said.

While FTX’s rescue package initially supported BlockFi, dealing with FTX’s Alameda Research Limited further undermined BlockFi’s stability. As Alameda wound down and FTX moved closer to bankruptcy, BlockFi attempted to execute margin calls and loan recalls on their Alameda exposure.

Ultimately, however, Alameda defaulted on “approximately $680 million” in BlockFi-backed loans, “the recovery of which is unknown,” the court said.

BlockFi was forced to do what it resisted during the Voyager and Celsius meltdowns. On November 10, the day FTX filed for bankruptcy, BlockFi stopped customer withdrawals. Investors, such as with FTX, Voyager and Celsius, are now in limbo and unable to access their funds.

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