Revealed the first victim of bankruptcy because of FTX: Once a ‘strong’ digital currency lending company, now ‘hugging’ 100,000 creditors

A cryptocurrency lending company has just filed for bankruptcy, becoming the latest victim in the collapse of the Sam Bankman-Fried empire, according to CNN.

Cryptocurrency lending company BlockFi has just filed for bankruptcy, thereby becoming the latest victim in the collapse of the Sam Bankman-Fried empire, according to CNN.

Earlier this month, BlockFi announced a halt to withdrawals, citing “substantial involvement” with Bankman-Fried’s crypto exchange FTX as well as its “sister hedge fund” Alameda. Previously, FTX, Alameda and dozens of other affiliates filed for bankruptcy on 11/11.

“Since the pause, we have considered every strategic option and alternative available, while focusing on our primary goal of doing what is best for our customers,” the company said. know in a statement.

Shortly after filing for bankruptcy, BlockFi sued Emergent Fidelity Technologies, a subsidiary of Bankman-Fried; required the company to hand over collateral that BlockFi considers owed. This total mortgage, according to the Financial Times, is Bankman-Fried’s 7.6 percent stake in the Robinhood online trading app.

BlockFi is a privately held company, founded in 2017 by Zac Prince and Flori Marquez, that lends money to customers using cryptocurrencies as collateral. In its bankruptcy filing, BlockFi says it has more than 100,000 creditors. The most typical are Ankura Trust with 729 million USD and FTX, BlockFi’s second largest creditor, with 275 million USD.

According to CNN, BlockFi currently holds about $257 million in cash. The company’s total assets and liabilities are estimated to be between $1 billion and $10 billion. The restructuring process includes layoffs, but it is not clear how many will lose their jobs. Earlier, BlockFi said it had proposed an internal plan to significantly reduce costs, including labor costs.

It is known that BlockFi, based in New Jersey, was one of the companies to receive financial support from Bankman-Fried this summer, a time when the cryptocurrency market continuously plummeted, making the future of the “soldiers” known. ” in the struggling ecosystem. Previously, this company was also heavily affected by the collapse of the LUNA coin and faced the risk of bankruptcy.

After the crash of FTX, the crypto industry saw a series of consequences. According to Monsur Hussain, Senior Director of Fitch Ratings, BlockFi’s Chapter 11 restructuring has exposed significant risks associated with the crypto ecosystem.

“The restructuring process could be lengthy,” said Monsur Hussain, noting that creditors related to Mt. Gox, a Bitcoin exchange that went bankrupt in 2014, took eight years to get paid.

Immediately after the collapse of FTX, the lending division of crypto brokerage Genesis halted new buybacks and loans, amid a spike in the number of users requesting “unusual” withdrawals. It is known that Genesis is one of the highly regarded companies in the industry.

In 2021 alone, it lent more than $130 billion and processed nearly $120 billion in transactions. Therefore, according to Brad Harrison, founder of decentralized lending protocol Venus, the collapse of a large intermediary like Genesis threatens to “push the cryptocurrency industry several years behind”.

“In the crypto world, the moment you see a company announce that it is suspending withdrawals, it is a pity,” said Daniel Roberts, Editor-in-Chief of Decrypt Media, a crypto news outlet.

One of Genesis’ partners, Gemini – the cryptocurrency company founded by Tyler and Cameron Winklevoss – soon warned customers about the risk of service delays. At the time, Gemini was partnering with Genesis to help customers exchange money and earn interest on holdings. The company said no other Gemini products or services were affected.

FTX began to fall apart in early November, when questions surrounding its relationship with Alameda repeatedly left investors bewildered. The skyrocketing withdrawals pushed FTX into an unprecedented liquidity crisis, thereby revealing the scary dark sides of the company’s mismanagement.

In order to fulfill the debt payment obligations for the “sister fund”, FTX borrowed billions of dong from customers’ deposits and silently guaranteed Alameda. This was acknowledged by Bankman-Fried in an interview with the Times, but the details have not been disclosed.

“It’s basically bigger than I thought,” Bankman-Fried told the Times. “And in fact, the risk of falling prices is huge.”

According to CNBC, unauthorized use of client funds is a violation of FTX’s own terms and conditions. For Wall Street, this behavior clearly violated US securities laws.

“FTX and Alameda have an extremely troubled relationship,” Castle Island Venture’s Nic Carter told CNBC. “Bankman-Fried runs both the exchange and the backing company. This is unorthodox and not allowed in the market.”

Often, companies create a lot of crypto tokens to entice users, when their real value is merely a form of speculation hoping the price will increase.

The bottom line is that FTX extracted customer assets as collateral for loans, then covered it up with a new trading code. The play is similar to the story of energy company Enron nearly two decades ago: concealing losses by transferring underperforming assets to subsidiaries that are not on the balance sheet, then create complex financial instruments to conceal.

By: CNN, CNBC