BlockFi files for bankruptcy then sues Sam Bankman-Fried holding company

BlockFi logo displayed on a phone screen is seen through the broken glass in this illustration photo taken in Krakow, Poland on November 14, 2022. (Photo by Jakub Porzycki/NurPhoto via Getty Images)
Crypto-lender BlockFi has filed for bankruptcy after suffering a liquidity crisis due to FTX exposure. Photo:Jakub Porzycki/NurPhoto/Getty

Crypto-lender BlockFi has filed for bankruptcy and is now suing Sam Bankman-Fried's holding company, after suffering a liquidity crisis due to FTX exposure.

On Monday the New Jersey-based company contacted customers and said: "BlockFi today voluntarily filed petitions for Chapter 11 reorganisation.

"This action follows the shocking events surrounding FTX and associated corporate entities (“FTX”) and the difficult but necessary decision we made, as a result, to pause most activities on our platform."

In the bankruptcy filing BlockFi's financial advisor Mark Renzi said: "Although the debtors' exposure to FTX is a major cause of this bankruptcy filing, the debtors do not face the myriad issues apparently facing FTX."

Renzi added that Blockfi intends to seek authority to honour client withdrawal requests from its customer wallet accounts.

He said: “BlockFi clients may ultimately recover a substantial portion of their investments"

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Customer withdrawals are still frozen on the BlockFi platform, however, the crypto-lender has applied to the bankruptcy court to be allowed to continue to operate its business.

But this business is confined to paying employee wages and continuing employee benefits.

The company said in a separate filing it plans to lay off two-thirds of its 292 employees.

BlockFi is also suing Bankman-Fried's Emergent Fidelity Technologies in an attempt to recover shares in Robinhood Markets Inc (HOOD.O) that were pledged as collateral to BlockFi before FTX filed for bankruptcy protection.

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The complaint against Bankman-Fried's Emergent Fidelity Technologies that was filed by BlockFi states that both parties entered into an agreement on November 9 to guarantee payment by an unnamed borrower, pledging an unnamed common stock as collateral.

However, according to the Financial Times, citing legal correspondence, the borrower was Bankman-Fried's Alameda Research.

Legal representatives for BlockFi have asked the court to enter an order directing Emergent Fidelity Technologies and EDFM to immediately transfer the owed collateral to a neutral party, and then ultimately to BlockFi.

BlockFi is the latest industry casualty after the firm was hurt by exposure to the spectacular collapse of the FTX exchange earlier this month.

Bankman-Fried's FTX collapsed dramatically earlier this month and filed for protection in the United States after traders pulled $6bn from the platform in three days after Binance CEO Changpeng 'CZ' Zhao tweeted the exchange would be selling his FTT holdings.

New Jersey-based BlockFi was founded by Zac Prince and Flori Marquez in 2017 and on Monday the firm listed its assets and liabilities as being between US$1 billion and US$10 billion.

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