The Collapse of BlockFi

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Published by Zara Yusuf at February 23, 2023

Background

Recently, cryptocurrency lender BlockFi, valued at $4bn last year, announced that it had entered bankruptcy proceedings in the US. The cryptocurrency company cited its collapse due to ‘significant exposure’ to FTX. Amidst doubts about the finances of FTX, people rushed to pull money from the platform, leading to its dramatic collapse.

Earlier last year, FTX had bought BlockFi following its financial troubles as the value of cryptocurrencies plunged. Significantly, this made FTX BlockFi’s second largest creditor, currently owing the exchange $275 million. With FTX under bankruptcy protection, the former crypto giant will seek to recoup its losses from its affiliated companies, including BlockFi. As a result, BlockFi will seek to restructure, recoup and settle its debts with its creditors. This will result in a suspension of customer withdrawals to avoid a run on the bank, whereby large groups of investors withdraw their money at the same time, causing an institution to become completely insolvent.

The current position

Currently, BlockFi reports assets and liabilities of $1bn to $10bn, with more than 100,000 creditors. This includes owing $30 million to the Securities and Exchange Commission (US financial regulator) after it found the firm misleading the public about the risk levels in its loan portfolio and lending activity. Of its assets, approximately 25% is held as cash. The company plans to use this cash to service its operations throughout the bankruptcy proceedings, as it intends to recover money for its investors.

Despite this, numerous investors have informed their backers that their investment has most likely evaporated, as the company scrambles to raise cash. Paradigm, a crypto-based venture fund, has predicted that its $278 million investment into the company is likely worthless. Prominent investors, including BlackRock, are facing scrutiny as their lack of oversight enabled the biggest crash seen in the crypto sector. Although investors are thought to have researched the company’s financials, they are yet to completely understand the full extent of the risk they had taken, as its downfall will take ‘many months to fully understand’ according to Paradigm.

The implication of its collapse

Given BlockFi’s collapse and the nature of its relationship with FTX, other crypto giants that have ‘significant exposure’ to FTX – like BlockFi, may be in danger. More importantly, this raises doubts about the future of cryptocurrency: is the collapse of BlockFi an isolated event or should this be viewed as a sign of the dangers of such an interconnected industry? The industry is made up of firms that trade and invest in each other’s products, if a major player like FTX falls, the whole sector is dramatically impacted.

In future, unless regulators around the world agree on a standardised and uniform framework for crypto regulation, the industry will always be subject to volatility. As a result, this may lead to less investment within the crypto market, especially given its opaque nature. This will reduce the future value of the currency, which is significant for those companies with considerable investment in the industry. Until the crypto giants are subjected to more regulation as well as transparency, the future of the industry does not look bright.