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BlockFi employees were discouraged from describing risks in internal communications: Report

In early November, Adrian Butkus, a 43-year-old father of two, put $600,000 — much of his life savings — into an account at BlockFi, a cryptocurrency trading firm. BlockFi had marketed the account as risk free, yielding 6.5 percent interest, more than Mr. Butkus could get anywhere else. Bankrupt crypto lender Voyager Digital, which was set to sell its assets to FTX after a $1.42 billion deal bid by the exchange in September, had a balance of approximately $3 million at FTX. Crypto blogger Tiffany Fong shared the communication sent to her by BlockFi on Dec. 19, commenting that the embattled firm appears to be moving much faster than Celsius, which filed for bankruptcy over five months ago, compared to BlockFi’s bankruptcy filing in November.

The revelation that Alameda’s balance sheet was mostly FTT tokens was the news that set off the unraveling of both Alameda and FTX and triggered contagion effects across the industry. In early November, Alameda defaulted on $680 million in loan obligations to BlockFi, according to the bankruptcy filing. The company started talking with restructuring professionals in the days after FTX’s bankruptcy filing, according to people familiar with the matter. The strategy, known as tax-loss harvesting, may apply to digital currency gains, or other assets, such as year-end mutual fund payouts.

New Jersey Acting Attorney General Matthew J. Platkin announced on February 14, 2022, that BlockFi had reached a parallel settlement agreement with New Jersey and 31 other states, arising from the same conduct found by the SEC. The New Jersey Bureau of Securities, along with securities regulators from other states, alleged that BlockFi had raised at least $14.7 billion worldwide through the sale of unregistered securities. Under this agreement, BlockFi will pay $50 million to be divided equally among participating members of the North American Securities Administrators Association. The filing in a New Jersey court on Monday comes as crypto prices plummet, with Bitcoin down more than 70 percent from a 2021 peak.

But the continuing ripples of the FTX financial crisis have highlighted some potential vulnerabilities in the crypto world, especially among centralized exchanges that allow users to convert cash into cryptocurrency. NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only.

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Approximately 130 additional affiliated companies are part of the proceedings, including Alameda Research, Bankman-Fried’s crypto trading firm, and FTX.us, the company’s U.S. subsidiary. The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. BlockFi says that customers seeking information about assets held on its platform should contact the company’s claims agent, a representative hired to deal with creditors in large bankruptcy cases. That option was never exercised, and the collapse of the cryptocurrency exchange sparked a bank run at BlockFi, seen by customers as dangerously entangled with Sam Bankman-Fried’s company, that proved terminal.

Jessica Carey, Roberto Gonzalez and Carly Lagrotteria Publish Article on Crypto Executive Order in Law360

In De-Fi lending arrangements, multiple lenders pool their assets in apps governed by code (known as “smart contracts”), which generate the loans and automate payouts. The BlockFi settlement provides guidance as to the SEC’s position on cryptocurrency lending as the industry continues to grow. SOPA Images/LightRocket via Getty ImagesIn its bankruptcy filing last week, New Jersey-based BlockFi attempted to paint itself as a responsible lender hit by plummeting crypto prices and the collapse of crypto brokerage FTX and its affiliated trading firm, Alameda. But a closer look at the company’s history reveals that its vulnerabilities likely began much earlier with missteps in risk management, including loosened lending standards, a highly concentrated pool of borrowers and unsustainable trading activity.

The SEC levied a $100m fine on the company in February for violating securities laws, arguing that the investment products the company offered qualified as unregistered securities. «Support from FTX, with its highly visible brand, bolstered customer confidence in the strength and safety of BlockFi’s platform,» he added. «And indeed, throughout the summer of 2022, BlockFi maintained its operations while several other trading platforms and exchanges were forced to declare bankruptcy.» «These events, individually and collectively, shook the confidence of cryptocurrency investors and caused a market purge, with substantial numbers of investors seeking to pull their funds from any and all cryptocurrency investments. BlockFi was not immune,» Renzi said.

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Without the ability to draw on the credit line, nor access its own funds stored on the FTX platform, BlockFi was forced to file for Chapter 11 bankruptcy. The exchange’s fall was all the more stunning because FTX had acquired an air of legitimacy through a splashy advertising https://cryptolisting.org/ campaign showing off its product as safe, fun and easy to use. Mr. Butkus said he had invested with BlockFi even though he knew the accounts weren’t insured. Under BlockFi’s offering, he lent it his $600,000 for six months, in return for a 6.5 percent yield.

Crypto lender BlockFi files for bankruptcy after FTX collapse

The crypto lender BlockFi has become the sector’s latest big operator to declare bankruptcy, as the fallout of the collapse of offshore cryptocurrency exchange FTX continues to spread. BlockFi has over 100,000 creditors, with liabilities and assets ranging from $1 billion to $10 billion, according to its bankruptcy filing, with one of the largest being «West Realm Shires,» the company publicly known as FTX.US, which has a $275 million unsecured claim. 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. Crypto lenders, the de facto banks of the crypto world, boomed during the pandemic, attracting retail customers with double-digit rates in return for their cryptocurrency deposits.

When he opened an account with FTX in March, Mr. Friemel said he knew it was unregulated but wasn’t too concerned. Silvergate Capital Corp said on Nov. 11 FTX represented less than 10% of $11.9 billion in deposits from all digital asset customers as of Sept. 30. The firm on Nov. 13 confirmed that it had up to $45 million in exposure to the now collapsed FTX cryptocurrency exchange, Bloomberg News reported. Crypto financial services company Galaxy Digital Holdings Ltd said in its third-quarter earnings statement on Nov. 9 – the day after FTX froze withdrawals – that it had $76.8 million worth of exposure to FTX, of which $47.5 million was «in the withdrawal process.» Binance Chief Executive Changpeng Zhao sparked concerns among investors on Nov. 6 when he said in a tweet that the crypto exchange would sell its holdings of FTT. In the filing, the company indicated that it had more than 100,000 creditors, with liabilities and assets ranging from $1 billion to $10 billion.

  • It enabled customers to trade digital currencies for other digital currencies or traditional money; it also had a native cryptocurrency known as FTT.
  • Eligibility for particular products and services is subject to final determination by BlockFi.
  • When the lending firm was undergoing financial hardships, BlockFi inked a deal with FTX that opened a $400 million revolving credit line in July.
  • In De-Fi lending arrangements, multiple lenders pool their assets in apps governed by code (known as “smart contracts”), which generate the loans and automate payouts.
  • Bankrupt crypto lender BlockFi has asked a U.S. court to greenlight customer withdrawals that are locked up in the platform, court filings show.
  • BlockFi’s longtime customer, FTX, has made its own claim to the Robinhood stock, owned by an Antiguan entity backed by Mr. Bankman-Fried.

But large potential borrowers were often unwilling to meet those requirements, a cease and desist order brought by the Securities and Exchange Commission against BlockFi in February states. The availability of uncollateralized capital from competing companies like Voyager created stiff competition in the lending field. «BlockFi looks forward to a transparent process that achieves the best outcome for all clients and other stakeholders,» Berkeley Research Group’s Mark Renzi said in a press statement. With both bankruptcy cases in limbo, customers may opt to file for a tax extension and wait for more details to emerge, Losi said. Currently, the so-called «wash sale rule» — which blocks investors from buying a «substantially identical» asset 30 days before or after the sale — doesn’t apply to cryptocurrency, he said. Typically, crypto trading is more active when the market is going up, and that’s when you are more likely to incur gains, he said.

You’re our first priority.Every time.

The crypto company, which offers a trading exchange and interest-bearing custodial service for cryptocurrencies, was one of many firms to face serious liquidity issues after the implosion of Three Arrows Capital. BlockFi’s bankruptcy filing shows that the company’s largest disclosed client has a balance of nearly $28 million. Distressed crypto firm BlockFi has filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the District of New Jersey following the implosion of putative acquirer FTX. While buying digital currency isn’t a taxable event, you may owe levies by converting assets to cash, trading for another coin, using it to pay for goods and services, receiving payment for work and more. Crypto lender BlockFi has filed for Chapter 11 bankruptcy, following the collapse of digital currency exchange FTX.

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«Acting in the best interest of our clients is our top priority and continues to guide our path forward,» BlockFi said. In a blog post, BlockFi said its Chapter 11 cases will enable the company to stabilize its business and maximize value for all stakeholders. 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. Eric Goldman, a professor at Santa Clara University School of Law and a director of its High Tech Law Institute, said big marketing and sports stadium branding campaigns are a popular way for tech start-ups to convey that their businesses are there for the long haul.

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. Just days later, as the collapse of the cryptocurrency exchange FTX shook the entire crypto industry, Mr. Butkus asked BlockFi for his money back. But the firm had suspended customer withdrawals, citing its close financial ties to FTX. Several cryptocurrency entities had the same fate as BlockFi and FTX earlier in the year, all of which BlockFi cites as part of the investor pessimism trend. Three Arrows Capital, who was one of BlockFi’s largest borrower clients, was included in the onslaught of collapsing crypto projects when it began liquidation in June of this year.

Bloomberg Technology

After seeing reports that FTX could collapse, Mr. Friemel tried to get his money out on Nov. 8, but it was too late. He said he got a notification that the withdrawal was being reviewed but never heard from FTX again. Adrian Butkus, who had $600,000 in a BlockFi account, and his family are staying at his mother-in-law’s house outside Chicago. Crypto exchange Binance’s U.S. unit is relaunching its bid to buy Voyager Digital, Coindesk reported last month. While FTX and Alameda owe BlockFi an estimated $1 billion, the state of financial obligations appears to be complicated by the $400 million line of credit extended to BlockFi by FTX.US on July 1.

The SEC found that the BIAs did not fall into any of the existing judicially created exceptions and did not bear any family resemblance to notes in those categories. On February 14, 2022, the SEC announced that it had entered into a consent order (the “Order”) with BlockFi Lending LLC (“BlockFi”), a New Jersey-based financial services company. BlockFi agreed to pay a $50 million penalty, cease its unregistered offers and sales of the BIAs and attempt to become ICA-compliant within 60 days. BlockFi also agreed to pay an additional $50 million what is itsmyne in fines to settle a group of parallel investigations—arising from the same conduct found by the SEC—initiated by 32 state attorneys general. 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. FTX, founded by Sam Bankman-Fried, filed for protection in the United States this month after traders pulled $6 billion from the platform in three days and rival exchange Binance abandoned a rescue deal.

In response to recent events, some crypto exchanges have begun publicizing additional details about what they hold in reserve to back up customer deposits. Examining these data may help you make an informed decision about where to buy or store your crypto. «We want to make sure we get people back as much of their value as quick as we can,» Josh Sussberg, a partner at BlockFi’s legal firm Kirkland & Ellis, said in a bankruptcy hearing on Tuesday. The company, per Sussberg, want to resume platform services to «maximize client recoveries» soon. President Biden has laid out a first-of-its-kind “whole of government” approach to supporting digital asset innovation and mitigating its risks, prompted by the explosive growth of cryptocurrency and blockchain technology.

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