BlockFi Inc. told a U.S. bankruptcy court on Tuesday it was blindsided by cryptocurrency exchange FTX’s rapid demise and would work to repay creditors and allow customers access to their digital wallets as soon as possible, WSJ Pro Bankruptcy reported. Jersey City, N.J.-based BlockFi, which secured a rescue loan from FTX in June to shore up its liquidity, reviewed unaudited FTX financial reports as part of due diligence it performed at the time of the transactions, said Joshua Sussberg, a lawyer for BlockFi, during its debut hearing in the U.S. Bankruptcy Court in Trenton, N.J. BlockFi filed for chapter 11 on Monday after the loan fell apart in the wake of FTX’s collapse earlier in November. BlockFi, which also counts FTX as one of its largest borrowers, is an early victim brought down by FTX’s downfall in an exceptionally intertwined and lightly regulated sector. Over the past few months, since a drastic drop in crypto prices that has wiped out roughly two-thirds of the sector’s market value, crypto hedge fund Three Arrows Capital, digital-assets lender Celsius Network LLC and crypto brokerage firm Voyager Digital have filed for chapter 11 protection. Given its entangled relationship with FTX, BlockFi on Tuesday sought to distinguish itself from the failed platform by assuring customers that it had appropriate internal controls in place and that it is working to return client funds as soon as possible.
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In related news, a BlockFi representative laid the blame for the crypto lender’s bankruptcy filing on Monday squarely on FTX Trading, whose Alameda Research affiliate defaulted on $680 million of collateralized loans to the digital financing platform, Forbes reported. BlockFi also sued a company controlled by FTX founder Samuel Bankman-Fried, apparently seeking to take control of a 56.3 million-share stake in the online brokerage Robinhood, after a separate default. In the bankruptcy case, an affidavit by Mark A. Renzi of Berkeley Research Group, a proposed financial adviser to BlockFi, revealed what the company’s communications earlier in the day hinted at: that financial exposure to the collapsed FTX conglomerate was the proximate cause of Monday’s petition for protection from creditors. FTX had engineered a bailout of BlockFi over the summer, as the collapse of the luna and terraUSD cryptocurrencies set off a cascade of liquidity events in the digital assets market. The deal had included a credit line of $400 million that BlockFi could tap. The company borrowed about $275 million, the affidavit indicated, and then sought $125 million more on November 8. FTX did not provide the additional funds, and it filed its own chapter 11 case three days later.
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