BlockFi blows up​

By Jake Rickman
Image credit - Formatoriginal / Shutterstock.com​

What do you need to know this week?

BlockFi, the retail cryptocurrency lender valued at $4bn last year, announced on Monday that it had entered Chapter 11 bankruptcy proceedings in the US state of New Jersey, according to an article published by the Financial Times. This comes roughly three weeks after FTX’s spectacular blow-up.

BlockFi reported in its Chapter 11 proceedings that it had assets valued at $1bn against $10bn in liabilities owed to more than 100,000 creditors. Of its assets, approximately 25% is held as cash, which BlockFi intends to use to service its operations throughout the Chapter 11 process.

BlockFi is backed by venture-capitalist and right-wing political activist Peter Theil. Other high-profile investors include Bain Capital, Coinbase, and the Winklevoss twins’ venture capital fund, Winklevoss Capital Management.

Why is this important for your interviews?

In a declaration, BlockFi’s exposure to FTX is cited as a substantial factor in the crypto-lender’s liquidity crisis. FTX was both a substantial lender to BlockFi as well as a custodian which held a portion of its assets. Pre-empting comparisons to FTX and its historic mismanagement by its founder, Sam Bankman-Fried, BlockFi’s financial adviser, Berkley Research Group, attempts to distance itself from FTX in one of its filings.

“Although the Debtor’s [i.e. BlockFi] exposure to FTX is a major cause of this bankruptcy filing, the Debtors do not face the myriad issues apparently facing FTX. Quite the opposite. Since its founding, BlockFi has…adopted corporate governance and risk management processes and took several other actions to protect its clients.”

The filing then goes on to give as examples of these actions of cooperation with the US’s Security Exchange Commission (SEC) as an example of how it has operated above-board.

This raises a question fundamental to the future of cryptocurrency: to what extent should this be viewed as the product of a contagion within the crypto markets? Or instead, is this merely an isolated incident?

The fact that a self-reportedly above-board crypto-lender has nonetheless had to seek Chapter 11 protection as a direct consequence of FTX’s blow-up suggests that other institutional players may be dangerously exposed to FTX.

If this is the case, traditional investors like Bain Capital are less likely to invest in crypto-companies in the future. This will in turn restrict the future value of crypto-assets and companies with considerable exposure to them. At least until these ventures are prepared to operate with more transparency and engage proactively with regulators to prevent future blow-ups. But doing so would be anathema to the ethos of the crypto and blockchain spaces, which is characterised by anonymity and decentralisation.

Understanding these tensions is necessary should you wish to discuss crypto in an interview setting.

How is this topic relevant to law firms?

Kirkland & Ellis serves as one of BlockFi’s legal advisers, along with international firm Haynes and Boone and boutique New Jersey firm Cole Schotz PC.