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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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U.S. cryptocurrency brokerage Genesis said it was seeking to avoid bankruptcy after Bloomberg news reported on Tuesday that creditors to the firm are organizing with restructuring lawyers to prevent insolvency, Reuters reported. Citing people with knowledge of the situation, the report said law firms Proskauer Rose and Kirkland & Ellis are being consulted by creditor groups, who are seeking to avoid a situation similar to crypto exchange FTX's rapid descent into bankruptcy. "Our goal is to resolve the current situation in the lending business without the need for any bankruptcy filing," a Genesis spokesperson said. The report comes as U.S. state securities regulators are investigating Genesis Global Capital as part of a wide-ranging inquiry into the interconnectedness of crypto firms, Barron's reported last week, citing a comment from the Alabama Securities Commission director. Genesis has hired investment bank Moelis & Company "to evaluate the best possible asset preservation strategy and effectuate a roadmap," the firm said in the letter. The crypto lending arm of U.S. digital asset broker Genesis Trading suspended customer redemptions earlier this month, citing the sudden failure of FTX, where its derivatives business has approximately $175 million in locked funds, the company had said.

Cryptocurrency lender BlockFi Inc. filed for bankruptcy Monday, making it the latest major digital-assets firm to fail since FTX, with which BlockFi is financially intertwined, WSJ Pro Bankruptcy reported. BlockFi’s chapter 11 filing continues the march of crypto platforms forced into insolvency following this summer’s crypto-price downturn and this month’s failure of FTX, a big exchange with ties throughout the largely unregulated industry. BlockFi, based in Jersey City, N.J., is only beginning to answer how its hundreds of thousands of customers will fare. The company’s top 10 creditors alone are owed close to $1.2 billion, according to its filings with the U.S. Bankruptcy Court in Trenton, N.J, with the total amount of liabilities likely to be much larger. The firm, founded in 2017 by Zac Prince and Flori Marquez and backed by Thiel Capital spinout Valar Ventures, lends money to customers using their cryptocurrency assets as collateral. Bain Capital, Tiger Global Management and a fund operated by the Winklevoss twins are also included among BlockFi’s equity investors, according to PitchBook Data Inc. BlockFi halted withdrawals and limited activity on its platform earlier this month after disclosing it had “significant exposure” to FTX. The Wall Street Journal reported earlier this month that BlockFi was preparing to file for bankruptcy in part due to its troubled relationship with the exchange.

Crypto exchange FTX and its affiliated companies, which have filed for U.S. bankruptcy court protection, said yesterday that most subsidiaries would resume ordinary course payment of salary and benefits to employees worldwide, Reuters reported. The relief includes cash payments with respect to both pre-petition and post-petition periods, subject to limits established by the orders of the Bankruptcy Court. "With the Court's approval of our First Day motions and the work being done on global cash management, I am pleased that the FTX group is resuming ordinary course cash payments of salaries and benefits to our remaining employees around the world," Chief Executive John Ray said in a statement. Last week, at the troubled crypto exchange's first bankruptcy hearing attorneys said FTX was run as a "personal fiefdom" of former CEO Sam Bankman-Fried and detailed on going challenges such as hacks and substantial missing assets. FTX on Nov. 11 filed for U.S. bankruptcy protection, along with its U.S. unit, crypto trading firm Alameda Research and nearly 130 other affiliates.

A bankruptcy judge said higher courts or Congress should clarify whether solvent companies can pass through chapter 11 bankruptcy without paying prepayment premiums and contractual interest to bondholders, WSJ Pro Bankruptcy reported. Judge Mary Walrath of the U.S. Bankruptcy Court in Wilmington, Del. said on Monday there is a higher likelihood the Supreme Court will weigh in if she elevated Hertz Global Holdings Inc.’s dispute with its bondholders directly to a Federal appellate court. Judge Walrath earlier this month rejected a request by a trustee for the Hertz bondholders to reconsider her 2021 ruling that had denied creditors the rights to interest payments at the contractual rate during bankruptcy. The trustee, Wells Fargo Bank N.A., had argued the car-rental company must pay $272 million including a make-whole premium and postbankruptcy interest at the contract rate. Hertz exited bankruptcy last year solvent, benefiting from surging prices for rental cars and used vehicles. The judge said earlier this month the best way may be to direct appeal to the Third Circuit. She said “this decision has to be decided by the Supreme Court or Congress.” In a written ruling on Monday, Judge Walrath clarified her earlier ruling and said Congress could have stated at the time it changed the bankruptcy code that a solvent debtor had to pay the contract rate of interest.

The company tasked with locking down the assets of the failed cryptocurrency exchange FTX says it has managed to recover and secure $740 million in assets so far, a fraction of the potentially billions of dollars likely missing from the company’s coffers, the Associated Press reported. The numbers were disclosed on Wednesday in court filings by FTX, which hired the cryptocurrency custodial company BitGo hours after FTX filed for bankruptcy on Nov. 11. The biggest worry for many of FTX’s customers is they’ll never see their money again. FTX failed because its founder and former CEO Sam Bankman-Fried and his lieutenants used customer assets to make bets in FTX’s closely related trading firm, Alameda Research. Bankman-Fried was reportedly looking for upwards of $8 billion from new investors to repair the company’s balance sheet. The $740 million figure is from Nov. 16. BitGo estimates that the amount of recovered and secured assets has likely risen above $1 billion since that date. The assets recovered by BitGo are now locked in South Dakota in what is known as “cold storage,” which means they’re cryptocurrencies stored on hard drives not connected to the internet. BitGo provides what is known as “qualified custodian” services under South Dakota law. It’s basically the crypto equivalent of financial fiduciary, offering segregated accounts and other security services to lock down digital assets.