How FTX’s ‘Death Spiral’ Killed BlockFi, According to Bankruptcy Filing

There was supposedly one man who could save crypto – Sam Bankman-Fried. the old FTX The CEO bailed out and took over crypto businesses as cryptocurrency markets withered with the spring Terra crash. In October, FTX won the bidding war for a bankrupt crypto firm Traveler Digital in a very advantageous offer.

With the collapse of FTX, the companies that Bankman-Fried rescued now find themselves in an uncertain situation. Voyager went up for auction again last week. Today, BlockFi filed for bankruptcy in New Jersey, after weeks of speculation that the collapse of FTX has left it fatally crippled.

FTX’s “death spiral”, as BlockFi advisor Mark Renzi put it, has now spread to another crypto entity. BlockFi’s bankruptcy had been anticipated for some time, but in a detailed 41-page filing, Renzi presents creditors, investors and the court with his perspective as head of BlockFi.

According to Renzi, exposure to two successive hedge fund bankruptcies, the bailout of FTX, and broader market uncertainty all conspired to force BlockFi into bankruptcy.

Renzi is keen to point out that from his point of view, BlockFi does not “face the myriad of issues that FTX apparently faces.” Renzi pointed to a $30 million settlement with the SEC and the company’s corporate governance and risk management protocols, writing that BlockFi is “well positioned to move forward despite the fact that 2022 has been a particularly terrible year for the cryptocurrency industry.”

The “problems” Renzi refers to may include FTX’s well-known lack of financial systems, risk, anti-money laundering (AML), or auditing. In a court filing, new FTX CEO John Ray said he had never seen “such a complete failure of corporate controls” as in FTX.

Indeed, Renzi is keen to point out the differences between BlockFi and FTX, and indeed argues that FTX’s intervention in the summer of 2022 ultimately worsened the results for BlockFi. Renzi is the managing director of Berkeley Research Group (BRG), which BlockFi hired as a financial advisor for their Chapter 11 proceedings.

BRG and Kirkland & Ellis, BlockFi’s legal counsel, have experience in crypto bankruptcies. Both Kirkland and BRG represented Voyager in its failing auction at FTX. The two companies have already collected millions in fees from BlockFi as part of the bankruptcy prep work, according to court documents.

Like the filings in the Voyager and Celsius Network bankruptcies, Renzi points to broader turbulence in cryptocurrency markets, accelerated by the collapse of crypto hedge fund Three Arrows Capital, as the driver of the crisis. liquidity from BlockFi.

BlockFi, like Celsius and Voyager, offered exceptionally high interest rates on customer crypto accounts. All three companies were able to do this through crypto-lending – lending customers’ cryptocurrencies to trading companies in exchange for high interest and collateral. Three Arrows, or 3AC, was “one of BlockFi’s biggest borrowing customers,” Renzi said in a court filing, and the hedge fund’s bankruptcy forced BlockFi to seek outside financing.

Another round failed for BlockFi. Traditional third-party investors have been spooked by “adverse” market conditions, Renzi said in a filing, forcing them to look to FTX only to clear client withdrawals. Unlike Voyager or Celsius, BlockFi had not halted customer withdrawals at this point.

FTX has assembled and issued a loan package of up to $400 million. In return, FTX reserved the right to acquire BlockFi as early as July 2023, according to the court filing.

While FTX’s bailout program initially supported BlockFi, FTX’s relationship with Alameda Research Limited further undermined BlockFi’s stability. As Alameda unwinded and FTX edged closer to bankruptcy, BlockFi attempted to execute margin calls and lending calls on their exposure to Alameda.

Ultimately, however, Alameda defaulted on “approximately $680 million” in BlockFi-backed loans, “the recovery of which is unknown,” the court filing said.

BlockFi was forced to do what it had resisted doing during the Voyager and Celsius collapses. On November 10, the day FTX filed for bankruptcy, BlockFi suspended customer withdrawals. Investors, like at FTX, Voyager and Celsius, are now left in limbo with no access to their funds.