BlockFi Bankruptcy: Creditors Blame Management, Not FTX, for Company’s Downfall

Digital asset lender's bankruptcy scene, dim-lit boardroom filled with tense creditors and management, somber mood, monochromatic colors with a touch of dark blue, shattered glass symbolizing the company's collapse, documents scattered showcasing poor decisions and restructuring failures, fading crypto coins, looming losses and financial disappointments.

The tension between the BlockFi Creditors Committee and the management of the bankrupt digital asset lender persists in a late Monday court filing. The creditors have contested BlockFi’s narrative that it was a victim of FTX and Alameda. In their opinion, the company’s downfall was due to poor management decisions and the actions of their restructuring agents.

The committee highlighted that following the FTX collapse, when crypto markets took a nosedive, BlockFi converted approximately $240 million in cryptocurrency into fiat. This caused significant financial losses and potential tax complications for customers. Subsequently, BlockFi deposited the converted funds, along with an extra $10 million, into Silicon Valley Bank (SVB). However, SVB later collapsed.

According to the creditors, SVB failed to provide the necessary protection required by the Bankruptcy Code, resulting in the United States Trustee objecting to estate money being deposited there. An agreement was eventually reached, where SVB would post sufficient collateral in the form of a bond in the event of a bank failure. However, neither BlockFi’s management nor the restructuring team managed to follow through with this, and no bond was posted. Fortunately, the federal government intervened to bail out all SVB depositors, including BlockFi.

The creditors also claim that BlockFi utilized $22.5 million of customer funds to buy a $30 million insurance policy for its directors and officers. They argue that, considering the 63% increase in bitcoin (BTC) since November 2022, this liquidation decision led to a loss of nearly $100 million in value.

It is important to note that parts of the court document, including paragraphs explaining the creditors’ opinion on BlockFi’s “false case narrative,” have been redacted. In light of BlockFi’s bankruptcy following FTX’s collapse, the company is set to return nearly $300 million to custodial wallet users after a recent ruling. However, it will retain $375 million from its interest-bearing accounts.

Despite securing $4.7 million from the sale of mining rigs, significant recoveries largely depend on the company’s claims against Alameda and FTX. Approximately $355 million in cryptocurrency remains frozen on FTX, with a $671 million loan to FTX’s affiliate, Alameda Research. BlockFi is expected to return to court on June 20.

Source: Coindesk

Sponsored ad