Bankrupt cryptocurrency lender BlockFi has filed a lawsuit against Connecticut Banking Commissioner Jorge Perez after the state regulator repeatedly refused to accept the company’s surrender of its Connecticut money transmitter license. By insisting on an administrative proceeding, BlockFi, already feeling the sting of the FTX collapse, would need to represent itself in another court proceeding, adding to its financial burden.
The company, which currently owes $1 billion to its largest creditors and has thousands of smaller retail investors waiting for fund withdrawals, has had its money transmitter license since April 2020. After filing for Chapter 11 bankruptcy protection in November, BlockFi was notified that it would need to surrender its license and attempted to do so in December. Receiving no response from the regulator, the company was instead hit with a license revocation notice and ordered to cease and desist doing business with Connecticut residents in February 2023. BlockFi’s desperate offers to surrender its license have met with further demands for a $1 million fine to avoid court proceedings.
With the Connecticut Department of Banking pursuing monetary penalties and license revocation, the cryptocurrency lender has been forced to retain legal counsel experienced in dealing with the department. This additional financial stress, combined with the uncertain outcome of the case, raises concerns about BlockFi’s ability to make its clients whole again. The company emphasized in its lawsuit that the department’s actions are motivated by pecuniary interests rather than public health, safety, or welfare.
BlockFi’s litigation against the Connecticut banking commissioner seeks two primary outcomes: to pause court proceedings and set a date for creating a restructuring plan, and to prove that the department violated Section 525 by revoking its license and pursuing civil penalties. While a summons has already been sent to Perez and BlockFi plans to argue in favor of its motion to avoid the proceedings on July 6, the administrative proceeding that the beleaguered crypto exchange has tried so hard to avoid is currently scheduled to begin on July 20.
This situation demonstrates the challenges of navigating rapidly changing regulatory landscapes for cryptocurrency companies as governments grapple with how to oversee and control this emerging market. The consequences of this struggle for control can be distressing for companies like BlockFi, which may find themselves caught in the crossfire, and their customers, who remain unsure about the safety of their investments.
Source: Decrypt
