BlockFi becomes another casualty of the FTX crypto exchange collapse

By now, you would think the crypto market has endured enough fallbacks but to add to the outbreak of collapses – BlockFi becomes the latest major exchange to file for bankruptcy.

Nations were beginning to welcome crypto, with the likes of the European Union’s MiCA, the UK’s Financial Services and Markets Bill (FSMB) amendment and the US Securities Exchange Commissioner clamping down on bad crypto actors. But the recent BlockFi and FTX collapses create a time of uncertainty – a crypto purgatory as we await further announcements from global regulators on the next steps.

What’s next for crypto? Perhaps further crashes or even immediate regulations are on the way to prevent further customers and investors from becoming victims of this loosely unregulated market. Only time will tell.

Buckle up. It could be a turbulent December for crypto.

BlockFi bankruptcy: the ins and outs

On 28 November 2022, New Jersey-based BlockFi filed for Chapter 11 bankruptcy protection, following the collapse of FTX. BlockFi was founded in 2017 and was promoted as a bridge between crypto and traditional financial products.

In the Spring of 2022, there were numerous losses during various crypto crashes. FTX signed a deal with BlockFi to provide the firm with a $400 million revolving credit facility.

Following the collapse of “crypto king” Sam Bankman Fried’s empire, BlockFi halted withdrawals due to its liquidity crisis which is believed to be caused by its exposure to FTX and sister hedge fund, Alameda.

On 11 November 2022, FTX, Alameda and many affiliates filed for bankruptcy – FTX’s failings impacted BlockFi’s financial health and shorted its financial life even after injecting money into it.

In the bankruptcy filing, it was mentioned that BlackFi owed funds to over 100,000 creditors. The largest creditor is Ankura Trust (owed $729 million) and the second-largest creditor is FTX (owed $275 million).

The aftermath of BlockFi

Just hours after BlockFi filed for bankruptcy, it filed a lawsuit against Sam Bankman-Fried’s, seeking his shares in Robinhood that were pledged as collateral earlier in November 2022.

In May 2022, Bankman-Fried acquired a 7.6% stake in the online brokerage firm, Robinhood.

As lawyers sift through the messy FTX collapse and other firms affected by it, the crypto industry has also taken a hit. BlockFi is the latest domino to fall and as a domino effect, Bitcoin and Ethereum are now at their lowest prices since 2020.

In a statement, BlockFi said, “Since the pause, our team has explored every strategic option and alternative available to us, and has remained laser-focused on our primary objective of doing the best we can for our clients.”

The Chapter 11 filing will allow BlockFi to “stabilise the business” and “consummate a reorganisation plan that maximises value for all stakeholders” and valued clients.  

BlockFi aims to get to the other side of the bankruptcy tunnel through “transparency” and by keeping its clients and stakeholders informed of progress.

How can we battle cynicism of the crypto market?

As mentioned above, perhaps, transparency is what is needed in the crypto market to spark more optimism. This could be achieved by instilling transparency across a firm’s governance and compliance policies.

The recent collapses desperately call for global coordination between regulators to deliver a borderless, standardised regulatory framework that nourishes the crypto industry whilst also protecting businesses and consumers.

The existing regulatory frameworks that oversee crypto fails to sufficiently protect those that have invested in crypto. Regulators must act now to prevent further investors from becoming victims. If left unregulated or if the pace of regulatory change is too slow, criminal activity and further financial harm to consumers will not be avoided.

CUBE comment

Crypto regulations need to work in a harmonious way that respects its cross-border activities.

Regulations can be ambiguous. With crypto regulations, they need to be as clear as day for compliance teams to know exactly what needs to be implemented to be fully complaint.

Following the BlockFi and FTX collapses, no doubt watertight frameworks will be implemented, but without collaboration and standardisation, the regulatory landscape could become more complex and delay meaningful progress in creating consistent frameworks to protect customers.

It’s a time in which every country and regulatory body should work collaboratively to establish a set of governance standards – so that one day, maybe, we can reach cryptopia.

This isn’t the end of crypto. It’s only the beginning. Even with several crashes, the industry always seems to come back stronger. And with the help of regulators, through the harmonisation of different nations, they would have a much greater chance at battling the cynicism of the crypto market.  

Keep ahead of emerging cryptocurrency regulations by speaking to CUBE.