Crypto lender BlockFi has filed for chapter 11 bankruptcy protection, citing exposure to the crypto derivatives exchanges FTX as a major factor in its financial troubles.
During the court filing which took place on Monday, in the United States Bankruptcy Court for the District of New Jersey, pertains to BlockFi its eight subsidiaries.
BlockFi however cataloged FTX as its second-largest creditor with a loan worth $275 million. BlockFi added in a different filing that it plans to cut out two-thirds of its total employees.
BlockFi, which offers cryptocurrency-backed loans to investors and businesses, claims that it lost significant amounts of both capital and liquidity due to leveraged positions on FTX. The company alleges that these losses severely damaged its ability to operate normally, forcing it to seek bankruptcy protection.
The crypto lender asserted that by filing for chapter 11, the company will be able to stabilize its business and increase value for all stakeholders.
“Act in the best interest of our clients is our top priority and continue to guide our path, “BlockFi stated. The BlockFi also hired Kirkland & Ellis and Haynes & Boone as their bankruptcy counsel.
BlockFi claims that the exposure of FTX through loans to Alameda was the actual cause of the liquidity crisis, as Crypto lenders were forced to liquidate positions. BlockFi liabilities and assets were listed and they ranged from $10 billion and $1 billion.
Withdrawals however were also paused from its platforms. After the filling, Renzi said that BlockFi is working to get permission from customers to honor withdrawal requests made from their wallet accounts.
Renzi goes ahead to say that BlockFi has sold a portion of its crypto assets during the start of November to be able to fund its bankruptcy. However, from the sales, BlockFi was able to raise $238.6 Million in cash, and it now possesses $256.5 million cash on hand.
BlockFi’s recent filing came after two of their largest competitor companies, Celsius Network and Voyager Digital, both filed for bankruptcy in July. The market conditions at that time were incredibly unstable, resulting in losses for both companies.
BlockFi is filing a series of customary motions with the Court to continue operating. It plans to request the Court to approve the payment of employee wages and the continuation of employee benefits on the first day.
BlockFi also plans to create a Key Employee Retention Plan in order to retain trained internal resources for business-critical functions during the chapter 11 process. The Company has also started an internal initiative to significantly lower personnel costs.
However, BlockFi’s bankruptcy filing may serve as a wake-up call for Crypto lenders, who will need to better manage their liquidity risks in order to avoid similar situations in the future. Whether or not the Crypto lending industry can bounce back remains to be seen.
BlockFi is set to have a hearing on Tuesday, and FTX has yet to comment.
