Headline: What the heck happened to BlockFi?

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Not so long ago, I walked through Union Station to take a train home.  It was markedly different post-pandemic.   Except for the occasional employee, or police officer, the only activity seemed to be the errant piece of trash blowing through.  (Pre-pandemic, there were hundreds of people gathering in the food courts, and there was even a bookstore, now gone.)  All of these changes took a while.   But, some changes come quickly.   Just a few months ago, when I had a reason to walk the station, I saw many large video billboards for BlockFi, some sort of credit card paid for with cryptocurrency, or so I thought.  Now, just on the heels of FTX, BlockFi is also going bankrupt.   What happened to make this fall so quickly from grace?   Can we learn anything from it?

Ok, so what happened?

Less than a week ago, BlockFi filed for a Chapter 11 Bankruptcy protection.  Chapter 11 Bankruptcy gives a company breathing room from creditors, and allows them to remain in business.  The company will work with creditors to re-negotiate payment schedules, either extending the time period for payback and/or lowering the interest rate of the debt.   (Half a loaf is better than no bread at all, right?)  They are still in business through this period so that they can make good on the most debt possible.  In fact, every plan is reviewed by the Courts and the best interest of the creditors must be reflected. (This plan will almost  certainly include some degree of layoffs.)   Interestingly, it appears that the legal counsel for BlockFi went to some pains to explain why it is so incredibly different than FTX

Different, yes, but related, well, kind of…

Several years ago, BlockFi loaned Alameda Research (the hedge fund associated with FTX) $680 Million.  Then, when BlockFi was on the ropes (roughly May of this year), FTX received a $400 Million credit facility from FTX, along with a pledge that FTX planned to buy it in the future.  As it turns out, each participant declined to honor its obligations to the tune of several hundred million dollars.  As if this were not bad enough, BlockFi used FTX for their trading platform and lost $355 Million in cryptocurrency locked up since FTX had their public insolvency. 

One other issue that is interesting is confidentiality.   A hallmark of an organized bankruptcy is transparency between the debtor and all creditors.   But, central to their business model is a long list of names and e-mail addresses of customers.  In the wrong hands, this intangible asset could be worth a lot.  The court is currently doing its best to weigh these 2 issues against each other.  For instance, we have learned through Court filings, that BlockFi’s largest creditor is the Ankura Trust.   BlockFi owes them $729 milllion.

In its bankruptcy filing, BlockFi said it owed money to more than 100,000 creditors. The largest creditor listed is Ankura Trust, a company that represents creditors in stressed situations, which is owed $729 million. FTX, BlockFi’s second-largest creditor, is owed $275 million.  The company estimates that they have a similar amount of cash on hand to deal with all creditors, and a total of $10 Billlion in total liabilities.   This one’s going to be interesting to watch (Most interesting is that the assets might actually be valued at only $1 Billion.   Stay tuned.)  For now, BlockFi has suspended withdrawals, so, the lawsuits coming out of this might also be interesting.

 The Verdict

“We are deeply saddened to see the devastation that is cascading across an industry that we love and believe in, touching the lives of so many people,”   This was written by a BlockFi official, and it rams home the need for appropriate regulation.  Now, unfortunately, the alphabet agencies of the Federal Government face 2 large problems:

1,  They are all competing with each other to be the agency in the lead of regulating this industry.   This is an old blood sport within the Federal Government, where each agency fights to regulate new areas of law, in order to garner the additional budgetary authority that will accompany that expansion.

2.  Not many people within the Federal Government really understand the cryptocurrency industry.     Education will be really important here.

But, as investors, this is interesting.   In the long-term, I strongly believe that some form of cryptocurrency is here to stay.   Whether it is Bitcoin, Ethereum or some other coin, I have no idea.  But, in the short term, I find it quite likely that  cryptocurrency will lose a lot of value as the federal government gets to know how to regulate this industry.  It would seem to me that this combination gives us an opportunity for careful investment.

REFERENCES

BlockFi tells U.S. bankruptcy court it is ‘the antithesis of FTX’ | Reuters

BlockFi files for bankruptcy as contagion grips crypto markets | CNN Business

BlockFi Files for Bankruptcy as FTX Contagion Spreads (coindesk.com)

BlockFi Files for Bankruptcy. What It Means for Investors (fool.com)

BlockFi declares bankruptcy in aftershock of FTX’s collapse : NPR

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.