Bankrupt crypto lender BlockFi wants to urgently resume platform withdrawals, so customers can have their funds back.
Why it matters: While that move may seem logical (especially to customers), it would be precedent-in-the-making for future crypto cases, touching on the all-important hierarchy of unsecured creditors.
The big picture: “There are precedents in a non-crypto exchange situation. The law is very clear,” Evan Jones, partner in the bankruptcy and restructuring group of O’Melveny & Myers, tells Axios.
- A client at a regulated broker-dealer would be first in line among unsecured creditors to get their money back in the event a firm failed, Jones explains, referencing those situations covered by the Securities Investor Protection Act (SIPA).
- “That law is developing with regard to crypto exchanges,” he says.
Driving the news: During BlockFi’s first hearing Tuesday in New Jersey, Kirkland Ellis partner Joshua Sussberg, representing BlockFi during the bankruptcy proceeding, said the firm intends to quickly file a motion requesting the resumption of customer withdrawals.
- “We do not believe this is the property of the estate.”
Yes, but: That doesn’t mean bankruptcy courts will allow BlockFi, FTX, Celsius and Voyager customers to be treated as SIPA liquidations would, in preference to general unsecured creditors.
What Happened: BlockFi, the defunct crypto lender that filed for bankruptcy at the end of November, is taking steps to return customer funds. According to an email it sent users, the company filed a motion with the U.S. Bankruptcy Court asking for authority to let BlockFi Wallet account holders withdraw their assets. The company plans to make the same move in front of the Supreme Court of Bermuda for non-U.S. wallet holders.
“While filing this motion is an initial step, we will continue to work towards solutions that maximize value for all clients and other stakeholders and will share updates as quickly as practicable,” the email to users said.
That’s not all. Some users attempted to withdraw funds before BlockFi officially froze their accounts. Those assets didn’t leave the platform but aren’t reflected in users’ balances — they’re currently in limbo. BlockFi wants to fix this. If the court approves its application, BlockFi could update users’ balances which would then make it easier for the cryptocurrency platform to honor future withdrawals.
So What: One of the big challenges for crypto investors is the lack of investor protection. Money held in a bank is protected against failure by FDIC insurance, but this does not apply to a lot of crypto assets. Some top crypto exchanges say funds held in U.S. dollars — not crypto assets — are covered by FDIC insurance. It isn’t clear how the money people deposited on crypto platforms will be handled in the different bankruptcy cases.
BlockFi is sending a clear message that the funds held in its BlockFi wallets belong to its clients and should not get pulled into any bankruptcy proceedings. The move sets BlockFi apart from other platforms (such as Celsius and FTX) that have also filed for bankruptcy this year. If the court gives it the green light, crypto held in BlockFi wallets could be released directly to users.
Now What: If you’re a BlockFi customer, pay attention to emails you receive from the company and don’t panic if you see changes to your account balance. Bear in mind that the move only applies to funds held in BlockFi wallets. The motion does not apply to funds held in BlockFi Interest Accounts. Key dates to watch are:
- Jan. 9, 2023: U.S. Bankruptcy Court will hear the motion
- Jan. 13, 2023: Supreme Court of Bermuda hearin
BlockFi Moving Faster Than Celsius, Says Crypto Blogger
Crypto writer Tiffany Fong tweeted an email she received from BlockFi on Dec. 19, stating that the troubled company seemed to be moving much more quickly than Celsius, which declared bankruptcy more than five months ago, compared to BlockFi’s bankruptcy filing in November.
A hearing to determine whether the motion will be granted is planned for Jan. 9, 2023, according to court records.
On Jan. 13, the Supreme Court of Bermuda will hear a different case involving wallet accounts maintained at BlockFi International.
On Nov. 11, BlockFi requested that customers refrain from depositing funds into BlockFi wallets or interest accounts and froze client withdrawals, citing a lack of clarity surrounding FTX.
BlockFi filed for Chapter 11 bankruptcy on Nov. 28 on its behalf and its eight subsidiaries.
On that same day, BlockFi International filed for bankruptcy with the Supreme Court of Bermuda.