BlockFi, a popular cryptocurrency lending platform, recently faced bankruptcy, freezing assets and causing distress among its users, particularly those who had held crypto in interest-bearing accounts. A judge ruled that these customers no longer have the right to nearly $375 million in crypto after the lender’s bankruptcy. However, some relief comes to customers who held crypto in custodial wallets, as they did not give up ownership rights, and BlockFi must return around $300 million to their accounts.
Back in November last year, BlockFi froze transfers and filed for bankruptcy, following the collapse of the now-defunct exchange FTX. Judge Michael Kaplan’s analysis points to issues with wallet transfers from interest-bearing accounts to custodial wallets, mentioning that the user interface failed to accurately reflect transactions after 8:15 pm ET on November 10. Consequently, those with assets tied up in interest-bearing accounts lost the right to their crypto despite receiving email and in-app confirmation from BlockFi.
In court, BlockFi said that $292 million in assets were stuck on the platform, all of which the company can cancel in light of Kaplan’s ruling. This decision proves problematic because users had relied on BlockFi’s interface for information about their assets. According to Kaplan, digital assets were not automatically transferred, causing confusion among clients.
Since late last year, the back-and-forth on account withdrawals has continued. In December, BlockFi filed a motion to permit processing of some withdrawals, although it was uncertain if interest-bearing accounts would be included. In April, the lending platform was granted extra time to file its bankruptcy strategy, with a deadline of May 15. Kaplan allowed the extension, hoping for a smoother continuation of the case.
Despite the drawbacks faced by customers with interest-bearing accounts, those with custodial wallets have some reason to celebrate, as BlockFi is required to return almost $300 million to them. However, this case highlights the challenges and pitfalls of dealing with digital assets and platforms, especially during times of financial distress. For the industry, it emphasizes the need for clear communication, transparency, and proper regulation to protect users from potential negative outcomes.
To stay up-to-date on the latest news and insights in the world of cryptocurrency, subscribe to Blockworks’ free newsletter and follow the top crypto events.
Source: Blockworks
