BlockFi
CASE SUMMARY: BlockFi Traces Bankruptcy Filing to Crypto ‘Contagion,’ ‘Unprecedented’ FTX Collapse; Debtors Will Pursue Sale in Parallel With Reorganization Giving Ownership to Account Holders
Mon 11/28/2022 19:27 PM
Relevant Documents:
Voluntary Petition
Plan
First Day Declaration
Complaint v. Emergent
First Day Hearing Agenda
Joining a number of crypto currency exchanges that have recently filed for bankruptcy relief, BlockFi, a Jersey City, N.J.-based provider of crypto exchange services, and several affiliates filed chapter 11 petitions today reporting $1 billion to $10 billion in both assets and liabilities. In addition to its exchange offerings, BlockFi also functions as a crypto bank, offering loan services and interest-bearing accounts to retail and institutional clients.
Following the “collapse of FTX, the BlockFi management team and board of directors immediately took action to protect clients and the Company,” says Mark Renzi of Berkeley Research Group in the company’s press release issued contemporaneously with the bankruptcy filing this morning. The debtors state that they enter bankruptcy with approximately $256.5 million of unencumbered cash and anticipate that this cash “will be sufficient to fund the costs” of the chapter 11 cases, indicating that they do not intend to seek approval of DIP financing “at this time.” As detailed below, the BlockFi debtors take pains in their first day papers to distinguish their corporate governance and operating procedures from those that have come to light in the FTX cases.
The case has been assigned to Judge Michael Kaplan (case No. 22-19361). The debtors are represented by Kirkland & Ellis and Haynes and Boone as bankruptcy co-counsel, Cole Schotz as local bankruptcy counsel, Berkeley Research Group as financial advisor, Moelis & Co. as investment banker, C Street Advisory Group as strategic and communications advisors and Walkers (Bermuda) Ltd. as special Bermuda counsel. The company is also working with Willis Towers Watson on employee compensation matters. Kroll is the claims agent.
The first day hearing is scheduled for tomorrow, Tuesday, Nov. 29, at 11:30 a.m. ET.
Along with the petitions, the debtors filed today a chapter 11 plan providing for the parallel pursuit of a sale of substantially all assets or a stand-alone restructuring. Under a sale, distributions would be funded by cash on hand, sale proceeds and proceeds from retained causes of action, with a plan administrator to be appointed to wind down the estates following the sale. Under the plan, FTX loan facility claims would be canceled without any distribution.
Under the stand-alone restructuring, account-holder claims at the various debtor entities would receive a pro rata share of cash at the applicable debtor and 100% of new common stock in reorganized BlockFi (less an “equity allocation pool” for general unsecured claims) with options to increase their share of stock by exchanging cash, or vice versa. Account holders at debtor BlockFi International would also receive a pro rata share of coins at that debtor, while account holders at debtor BlockFi Wallet LLC would receive only a coin allocation. Under a sale transaction, account-holder claims would receive a pro rata share of sale proceeds to the extent secured and priority claims are paid in full, with the exception of customer claims at BlockFi Wallet, for which the plan does not specify alternative plan treatment.
General unsecured claims at each debtor would receive a pro rata share of either cash or the equity allocation pool, defined as “the maximum aggregate amount of Equity to be distributed to holders of Allowed General Unsecured Claims.”
The company’s press release adds that the company seeks to “consummate a comprehensive restructuring transaction that maximizes value for all clients and other stakeholders,” and will “focus on recovering all obligations owed to BlockFi by its counterparties, including FTX.” In his first day declaration, Renzi attributes the filing to the “unprecedented, expedited collapse” of FTX and Alameda Research, which he says caused a “severe liquidity crunch” for BlockFi. Renzi additionally discloses that “FTX had been expected to acquire the Debtors before FTX’s true financial circumstances were revealed, FTX’s then-management team resigned, and FTX free-fell into bankruptcy,” leaving the BlockFi debtors “no choice” but to file for chapter 11 (emphasis added).
Renzi asserts that “BlockFi has fared better than many of its peers” and states that, “[a]lthough the Debtors’ exposure to FTX is a major cause of this bankruptcy filing, the Debtors do not face the myriad issues apparently facing FTX.” Again distinguishing BlockFi from FTX, Renzi says that, “[t]o date, I have not found any failure of corporate controls or systems integrity, and I have found BlockFi’s financial information to be trustworthy.”
Moving forward, Renzi says that the debtors are “open to any alternative that maximizes value,” and describes the plan as being “predicated on the Debtors’ goal to provide clients as close to a full recovery as possible.” The declaration adds that BlockFi’s “careful actions and decisive planning offer reason to believe that BlockFi clients may ultimately recover a substantial portion of their investments as BlockFi aims to maximize value for its constituents and position its business for success into the future” (emphasis added).
Renzi continues that the debtors “continue to analyze and expeditiously pursue an appropriate exit strategy” and will “consider all strategic alternatives and third-party solutions that emerge during the course of these cases.” The declaration adds that “[i]n part because of the careful work, prudent stewardship, and risk management processes implemented by BlockFi prepetition,” the debtors believe they are “well positioned to maximize value for stakeholders.” Renzi adds that a “full recovery for creditors would require, among other things, that the Debtors’ counterparties and third-party custodians meet their contractual and legal obligations,” but warns that the “full extent of the fallout from FTX’s collapse remains to be determined” (emphasis added).
According to the first day declaration, BlockFi’s “substantial exposure” to FTX includes the previously reported $400 million loan from FTX US and a related option agreement granting FTX US the right to acquire BlockFi Inc. Renzi says the debtors also made loans to Alameda Research, which defaulted on approximately $680 million of collateralized loan obligations, and hold crypto assets on FTX’s platform, “which became trapped on FTX’s platform due to its bankruptcy filing.” This exposure together “has created a liquidity crisis,” says Renzi. BlockFi adds that “[d]ue to the recent collapse of FTX and its ensuing bankruptcy process, which remains ongoing, the Company expects that recoveries from FTX will be delayed.”
Renzi continues that the debtors are “well-positioned to move forward” despite the “uniquely terrible year for the cryptocurrency industry.”
The filing was expected after BlockFi paused client withdrawals on Nov. 10, the day before fellow crypto exchange FTX Group's bankruptcy filing, pointing to the “lack of clarity on the status of FTX.com, FTX US and Alameda.” In a Nov. 14 update released by BlockFi, the company denied that a majority of its assets were custodied at FTX but did indicate that it had “significant exposure” to FTX, relating to “obligations owed to us by Alameda, assets held at FTX.com, and undrawn amounts from our credit line with FTX.US.” BlockFi says that platform activity continues to be paused as the company enters bankruptcy.
Reportedly, BlockFi suffered significant losses from loans to failed crypto hedge fund Three Arrows Capital, or 3AC, which instituted liquidating proceedings in the British Virgin Islands after it collapsed in May from exposure to the collapse of the Terra Luna stablecoin. Following these losses, FTX US extended a $400 million RCF that contained a purchase option.
In parallel with its chapter 11 cases, BlockFi International Ltd., a Bermuda incorporated company, filed a petition with the Supreme Court of Bermuda for the appointment of joint provisional liquidators in the near term. In connection with the liquidation proceedings, BlockFi International indicates that it will seek the appointment of EY as joint provisional liquidator, according to the corporate resolutions attached to the petition.
The company has developed a non-insider key employee retention program and non-insider targeted retention plan. The debtors filed an adversary complaint today against Emergent Fidelity Technologies Ltd., an affiliate of FTX founder Sam Bankman-Fried and Alameda, and ED&F Man Capital Markets Inc., seeking to enforce the terms of a pledge agreement and to recover certain unspecified collateral. Both filings are detailed further below.
BlockFi revealed in its chapter 11 petition that its three largest creditor claims are a $729 million indenture from Ankura Trust, a $275 million loan from FTX US holding company West Realm Shires, as well as a $30 million portion of a $100 million 2022 settlement payment to the U.S. Securities and Exchange Commission. According to a company report, the fair value of BlockFi’s institutional and retail loans totaled approximately $1.8 billion as of June 30.
The Ankura indenture claim is not specifically detailed but Ankura is referenced in the debtors’ cash management motion as the trustee for certain interest-bearing accounts. As described in the papers, the company’s prepetition capital structure includes:
Events Leading to the Bankruptcy Filing
Renzi’s first day declaration summarizes the events leading to BlockFi’s bankruptcy filing with the following timeline:
Renzi distills BlockFi’s 2022 year into “two acts that culminated in these filings: first, the overall cryptocurrency industry incidents that led BlockFi to seek additional liquidity, which was ultimately provided by FTX, and second, the collapse of FTX.”
Renzi points to the downturn in the crypto industry in 2022, marked by the Terra Luna collapse, a 65% decline in Bitcoin prices since January and insolvency proceedings commenced by 3AC, Voyager, Celsius and ultimately FTX, which he says combined to prompt “investor pessimism” and “led significant numbers of BlockFi’s clients to withdraw from its product offerings,” illustrated as follows:
“BlockFi had no direct exposure to Celsius, Luna, Terra, or Voyager, outside of offering clients facing BlockFi International the ability to trade Luna on its retail trading platform,” says Renzi (emphasis added). The declaration adds that BlockFi “took swift action to de-risk itself of exposure to 3AC, but could not totally evade the harm,” calling 3AC “one of BlockFi’s largest borrower clients” whose collapse “led to material losses for BlockFi.”
Although BlockFi “was able to withstand the loss from 3AC and other borrowers and process all customer withdrawals within the normal periods set forth in its customer agreements,” the declaration continues, the company “prudently sought additional liquidity to protect its client accounts into the indefinite future.”
Initial efforts to obtain equity financing from third-party investors were unsuccessful because of market conditions, says Renzi, leading the company to pursue alternatives. The process led to “an offer from FTX to essentially backstop customer withdrawals,” under which FTX US committed to loan BlockFi “up to $400 million notional amount of cryptocurrencies” “on a junior basis to BlockFi’s obligations to its clients.” The FTX US loan was accompanied by the option for FTX US to acquire BlockFi, which FTX US would have been able to exercise “as early as July 2023.” Renzi says the FTX transaction was supported by 89% of BlockFi’s shareholders.
Renzi continues that the FTX transaction came with “steep costs on BlockFi personnel and shareholders, explaining that the company’s executives and employees “were required to (and did) sacrifice hundreds of millions of dollars of their own equity value.” BlockFi ultimately accepted the deal because “client protection remains paramount” for the company, says Renzi. In addition, the declaration continues, BlockFi “significantly reorganized its workforce,” reducing employee headcount by over 20% “in a further effort to protect client value and chart a return to profitability.”
The support from FTX, “with its highly visible brand,” “bolstered customer confidence in the strength and safety of BlockFi’s platform,” says the declaration, adding that “throughout the summer of 2022, BlockFi maintained its operations while several other trading platforms and exchanges were forced to declare bankruptcy.”
But “FTX’s apparent ‘rescue’ was short-lived,” says Renzi, turning to “Act Two,” the collapse of FTX.
Prior to the transaction, BlockFi “acted as a lender” to Alameda “starting in 2019” and traded on the FTX platform “starting in 2021.” The loans to Alameda “have varied over time” and typically consisted of digital assets - primarily Bitcoin and Ethereum - and USD-denominated stablecoins, says the declaration. Renzi adds that as part of the company’s regular credit evaluation process, BlockFi received financial reporting from Alameda and held “regular dialogue” with its staff, “who made ongoing representations regarding its financial standing, significant equity capital, and unencumbered assets on Alameda’s balance sheet.”
Renzi details the events surrounding the FTX/Alameda “death spiral,” beginning with the Nov. 2 leak of Alameda’s balance sheet, which showed that approximately $5.8 billion of $14.6 billion of assets reported consisted of FTX’s proprietary FTT token, and culminating in FTX/Alameda’s chapter 11 filing and new FTX CEO John Ray’s statements regarding “complete failure of corporate controls” and “complete absence of trustworthy financial information.”
In response to the FTX collapse, says Renzi, BlockFi took “several proactive measures to attempt to limit its exposure to FTX and Alameda through a combination of margin calls and recalls of open-term loans.” In early November, BlockFi requested additional borrowing under the FTX loan agreement, “which was not honored,” and thereafter Alameda “defaulted on approximately $680 million of collateralized loan obligations to BlockFi, the recovery on which is unknown.”
On Nov. 10, to address the resulting liquidity shortage, BlockFi decided to “limit platform activity,” including pausing customer withdrawals. The company engaged restructuring advisors after FTX’s Nov. 11 filing and ultimately determined to seek bankruptcy relief.
“In preparation for these chapter 11 cases,” says the declaration, “BlockFi took steps to liquidate certain of its owned cryptocurrency to bolster available cash to fund its business and administrative costs.” The company “was able to raise $238.6 million of additional cash” through this process, “for a total unencumbered cash position as of the Petition Date of $256.5 million.”
Background
BlockFi was founded in 2017 by Zac Prince and Flori Marquez. The company never launched its own token to raise funds, instead relying on traditional venture capital. Between 2019 and March 2022, BlockFi’s total trading volume “grew from $2 million to more than $23 billion as of March 2022 (on an LTM basis), while deployable assets grew from $345 million to $14.8 billion and gross loan originations expanded from $687 million to more than $47 billion.” The company holds 47 licenses for lending, money transmission, operations and related services by 32 states and Washington, D.C., and “received a separate Class F Digital Business Assets License from Bermuda,” says the declaration.
BlockFi has retail and institutional clients. For retail clients, the debtors offer BlockFi interest accounts (through which clients can earn interest on supported digital assets), a private client program, retail client loans (through which clients can borrow U.S. dollar or stablecoins secured by certain types of digital assets collateral), trading of digital assets supported by BlockFi and a rewards card program (which was terminated by Visa on Nov. 16, according to the declaration).
In addition, BlockFi offers customer wallet accounts, which are to be funded either by transferring supported digital assets from a personal wallet to a wallet address provided by BlockFi, which would then record the digital assets to the customer wallet account, or by transferring U.S. dollar fiat currency to the company’s account at Silvergate Bank, which is used to purchase supported digital assets recorded in the customer wallet account.
Institutional clients can also open a BlockFi wallet to store digital assets or earn interest through interest earning accounts, and are also offered a “custom suite” of services, including custom trading services.
According to the declaration, the BlockFi wallet terms of service provide that the “‘title to the cryptocurrency held in your BlockFi Wallet shall at all times remain with you and shall not transfer to BlockFi,’” and the debtors say that they “intend to seek authority to honor client withdrawal requests from Customer Wallet Accounts during the early stages of these chapter 11 cases” (emphasis added).
In contrast, the debtors assert they have the right to “redeploy” and otherwise “pledge, repledge, hypothecate, [or] rehypothecate” assets under the company’s other retail based programs - the BlockFi Interest Accounts, the BlockFi Private Client and Retail Client Loans.
In 2021, the SEC, along with several state regulators, sent inquiries regarding whether BlockFi’s interest-bearing accounts were securities requiring registration. BlockFi resolved these disputes through a settlement, including agreeing to stop offering the then-existing interest-bearing accounts to U.S. clients. Thereafter, BlockFi developed a new product - “BlockFi Yield,” and prepared a Form S-1 to be registered with the SEC.
BlockFi claims it is an “industry leader in transparency,” and posts a quarterly “transparency report” to update clients about assets (the latest report is HERE). “BlockFi was forthright about what it would and would not do with funds on its platform - in stark contrast to others reported to have done the opposite,” the first day declaration states.
BlockFi touts that it is “the only cryptocurrency platform to have reached such a settlement with the SEC regarding an interest-bearing cryptocurrency account product and pursued the appropriate regulatory process for approval.”
The declaration describes the company’s “well-developed, transparent risk management procedures and policies,” which Renzi says have been “enhanced and updated over time as BlockFi has grown and learned from its accumulated experience and expertise.” Recognizing the need for “better controls” after sustaining losses in 2020 and early 2021, the declaration states that BlockFi “reorganized its risk governance, hired a new risk officer and risk management staff, and enhanced the transparency of its procedures and risk protocols.” The BlockFi board also established an audit and risk committee to, among other things, oversee the audit of company financial statements by an independent accounting firm, evaluate internal controls and review related-party transactions.
Renzi says that the risk management team is “independent” from the core business and includes “veterans of the traditional financial industry with decades of experience in identifying and managing risk in credit and trading operations.”
Before the petition date, the debtors appointed independent directors or managers, as follows:
The declaration includes the below organizational chart for the debtors:
The debtors' largest unsecured creditors are listed below:
The case representatives are as follows:
Plan
A chart of the plan’s classes, along with their impairment status and voting rights, is shown below:
Treatment of Claims and Interests
The debtors’ plan sets forth the following classification of and proposed distributions to holders of allowed claims and interests:
Other Plan Provisions
The plan notes that the release and exculpation provisions and related definitions “remain subject to the outcome of an ongoing investigation by the independent directors at the applicable Debtor entities.” In its current form, the plan states that FTX would not be a released party.
At the effective date, the existing board of directors will appoint the members of a new board. The identities of the new board members will be disclosed in a forthcoming plan supplement.
Adversary Complaint v. Emergent Fidelity Technologies, ED&F Man Capital Markets
Along with the petitions, BlockFi Inc. and several affiliates filed an adversary complaint today against Emergent Fidelity Technologies Ltd., an entity affiliated with FTX founder Bankman-Fried and Alameda, and ED&F Man Capital Markets Inc. seeking to enforce the terms of a Nov. 9 pledge agreement and to recover collateral.
According to the complaint, the pledge agreement was given in consideration for BlockFi entering into an amendment and forbearance agreement on Nov. 9, pursuant to which BlockFi agreed to forbear from exercising rights and remedies due to “multiple” events of default. Emergent guaranteed the payment obligations of the borrower under the forbearance agreement, with the guaranty secured by a first lien in favor of BlockFi in all of Emergent’s right and interest in the collateral, including certain shares of common stock. Emergent was required to deliver all collateral shares to BlockFi in accordance with the pledge agreement but failed to do so, according to the complaint.
The debtors are seeking injunctive relief directing that Emergent and/or EDFM immediately transfer the collateral to a neutral party and eventually BlockFi. The debtors also request that EDFM be ordered not to make any disbursement from the collateral.
Further, the debtors seek damages for breach of the pledge agreement, declaratory relief and attorneys’ fees. The debtors also argue that Emergent has been “unjustly enriched by ignoring its obligations under the Pledge Agreement and continuing to allegedly maintain ownership rights in the Collateral.”
The debtors also filed a related motion seeking an order directing that the collateral be transferred to a neutral broker or escrow or enjoining the defendants from transferring or using the collateral pending final resolution of the turnover claims.
Other Motions
The debtors also filed various standard first day motions, including the following:
Voluntary Petition
Plan
First Day Declaration
Complaint v. Emergent
First Day Hearing Agenda
| Summary |
| BlockFi filed chapter 11 and Bermuda liquidation proceedings in the wake of the collapse of FTX, which was previously expected to acquire BlockFi after extending rescue financing earlier this year. FTX US is BlockFi’s second-largest creditor, owed $275 million under an unsecured credit facility. |
| The debtors have filed a chapter 11 plan for a stand-alone restructuring with the goal of providing customers with “as close to a full recovery as possible,” but will pursue an all-asset sale process in parallel and “remain open” to other strategic alternatives. |
| The first day declaration attempts to distinguish BlockFi from FTX, highlighting well-developed corporate controls and “careful actions and decisive planning” prior to the filing that makes the company “well-positioned” to restructure with approximately $256.2 million in cash and no need to pursue DIP financing. The debtors note that they are the only cryptocurrency exchange to have reached a settlement with the Securities and Exchange Commission regarding an “interest-bearing cryptocurrency account product.” |
Joining a number of crypto currency exchanges that have recently filed for bankruptcy relief, BlockFi, a Jersey City, N.J.-based provider of crypto exchange services, and several affiliates filed chapter 11 petitions today reporting $1 billion to $10 billion in both assets and liabilities. In addition to its exchange offerings, BlockFi also functions as a crypto bank, offering loan services and interest-bearing accounts to retail and institutional clients.
Following the “collapse of FTX, the BlockFi management team and board of directors immediately took action to protect clients and the Company,” says Mark Renzi of Berkeley Research Group in the company’s press release issued contemporaneously with the bankruptcy filing this morning. The debtors state that they enter bankruptcy with approximately $256.5 million of unencumbered cash and anticipate that this cash “will be sufficient to fund the costs” of the chapter 11 cases, indicating that they do not intend to seek approval of DIP financing “at this time.” As detailed below, the BlockFi debtors take pains in their first day papers to distinguish their corporate governance and operating procedures from those that have come to light in the FTX cases.
The case has been assigned to Judge Michael Kaplan (case No. 22-19361). The debtors are represented by Kirkland & Ellis and Haynes and Boone as bankruptcy co-counsel, Cole Schotz as local bankruptcy counsel, Berkeley Research Group as financial advisor, Moelis & Co. as investment banker, C Street Advisory Group as strategic and communications advisors and Walkers (Bermuda) Ltd. as special Bermuda counsel. The company is also working with Willis Towers Watson on employee compensation matters. Kroll is the claims agent.
The first day hearing is scheduled for tomorrow, Tuesday, Nov. 29, at 11:30 a.m. ET.
Along with the petitions, the debtors filed today a chapter 11 plan providing for the parallel pursuit of a sale of substantially all assets or a stand-alone restructuring. Under a sale, distributions would be funded by cash on hand, sale proceeds and proceeds from retained causes of action, with a plan administrator to be appointed to wind down the estates following the sale. Under the plan, FTX loan facility claims would be canceled without any distribution.
Under the stand-alone restructuring, account-holder claims at the various debtor entities would receive a pro rata share of cash at the applicable debtor and 100% of new common stock in reorganized BlockFi (less an “equity allocation pool” for general unsecured claims) with options to increase their share of stock by exchanging cash, or vice versa. Account holders at debtor BlockFi International would also receive a pro rata share of coins at that debtor, while account holders at debtor BlockFi Wallet LLC would receive only a coin allocation. Under a sale transaction, account-holder claims would receive a pro rata share of sale proceeds to the extent secured and priority claims are paid in full, with the exception of customer claims at BlockFi Wallet, for which the plan does not specify alternative plan treatment.
General unsecured claims at each debtor would receive a pro rata share of either cash or the equity allocation pool, defined as “the maximum aggregate amount of Equity to be distributed to holders of Allowed General Unsecured Claims.”
The company’s press release adds that the company seeks to “consummate a comprehensive restructuring transaction that maximizes value for all clients and other stakeholders,” and will “focus on recovering all obligations owed to BlockFi by its counterparties, including FTX.” In his first day declaration, Renzi attributes the filing to the “unprecedented, expedited collapse” of FTX and Alameda Research, which he says caused a “severe liquidity crunch” for BlockFi. Renzi additionally discloses that “FTX had been expected to acquire the Debtors before FTX’s true financial circumstances were revealed, FTX’s then-management team resigned, and FTX free-fell into bankruptcy,” leaving the BlockFi debtors “no choice” but to file for chapter 11 (emphasis added).
Renzi asserts that “BlockFi has fared better than many of its peers” and states that, “[a]lthough the Debtors’ exposure to FTX is a major cause of this bankruptcy filing, the Debtors do not face the myriad issues apparently facing FTX.” Again distinguishing BlockFi from FTX, Renzi says that, “[t]o date, I have not found any failure of corporate controls or systems integrity, and I have found BlockFi’s financial information to be trustworthy.”
Moving forward, Renzi says that the debtors are “open to any alternative that maximizes value,” and describes the plan as being “predicated on the Debtors’ goal to provide clients as close to a full recovery as possible.” The declaration adds that BlockFi’s “careful actions and decisive planning offer reason to believe that BlockFi clients may ultimately recover a substantial portion of their investments as BlockFi aims to maximize value for its constituents and position its business for success into the future” (emphasis added).
Renzi continues that the debtors “continue to analyze and expeditiously pursue an appropriate exit strategy” and will “consider all strategic alternatives and third-party solutions that emerge during the course of these cases.” The declaration adds that “[i]n part because of the careful work, prudent stewardship, and risk management processes implemented by BlockFi prepetition,” the debtors believe they are “well positioned to maximize value for stakeholders.” Renzi adds that a “full recovery for creditors would require, among other things, that the Debtors’ counterparties and third-party custodians meet their contractual and legal obligations,” but warns that the “full extent of the fallout from FTX’s collapse remains to be determined” (emphasis added).
According to the first day declaration, BlockFi’s “substantial exposure” to FTX includes the previously reported $400 million loan from FTX US and a related option agreement granting FTX US the right to acquire BlockFi Inc. Renzi says the debtors also made loans to Alameda Research, which defaulted on approximately $680 million of collateralized loan obligations, and hold crypto assets on FTX’s platform, “which became trapped on FTX’s platform due to its bankruptcy filing.” This exposure together “has created a liquidity crisis,” says Renzi. BlockFi adds that “[d]ue to the recent collapse of FTX and its ensuing bankruptcy process, which remains ongoing, the Company expects that recoveries from FTX will be delayed.”
Renzi continues that the debtors are “well-positioned to move forward” despite the “uniquely terrible year for the cryptocurrency industry.”
The filing was expected after BlockFi paused client withdrawals on Nov. 10, the day before fellow crypto exchange FTX Group's bankruptcy filing, pointing to the “lack of clarity on the status of FTX.com, FTX US and Alameda.” In a Nov. 14 update released by BlockFi, the company denied that a majority of its assets were custodied at FTX but did indicate that it had “significant exposure” to FTX, relating to “obligations owed to us by Alameda, assets held at FTX.com, and undrawn amounts from our credit line with FTX.US.” BlockFi says that platform activity continues to be paused as the company enters bankruptcy.
Reportedly, BlockFi suffered significant losses from loans to failed crypto hedge fund Three Arrows Capital, or 3AC, which instituted liquidating proceedings in the British Virgin Islands after it collapsed in May from exposure to the collapse of the Terra Luna stablecoin. Following these losses, FTX US extended a $400 million RCF that contained a purchase option.
In parallel with its chapter 11 cases, BlockFi International Ltd., a Bermuda incorporated company, filed a petition with the Supreme Court of Bermuda for the appointment of joint provisional liquidators in the near term. In connection with the liquidation proceedings, BlockFi International indicates that it will seek the appointment of EY as joint provisional liquidator, according to the corporate resolutions attached to the petition.
The company has developed a non-insider key employee retention program and non-insider targeted retention plan. The debtors filed an adversary complaint today against Emergent Fidelity Technologies Ltd., an affiliate of FTX founder Sam Bankman-Fried and Alameda, and ED&F Man Capital Markets Inc., seeking to enforce the terms of a pledge agreement and to recover certain unspecified collateral. Both filings are detailed further below.
BlockFi revealed in its chapter 11 petition that its three largest creditor claims are a $729 million indenture from Ankura Trust, a $275 million loan from FTX US holding company West Realm Shires, as well as a $30 million portion of a $100 million 2022 settlement payment to the U.S. Securities and Exchange Commission. According to a company report, the fair value of BlockFi’s institutional and retail loans totaled approximately $1.8 billion as of June 30.
The Ankura indenture claim is not specifically detailed but Ankura is referenced in the debtors’ cash management motion as the trustee for certain interest-bearing accounts. As described in the papers, the company’s prepetition capital structure includes:
- FTX loan agreement: Approximately $275 million of USD stablecoins loans outstanding (as of the petition date under a $400 million unsecured loan agreement with West Realm Shares, dba FTX US, of which: $300 million was available for general corporate purposes and $100 million solely to fund BlockFi’s obligations to its clients. The loans are pari passu in right of payment with all other senior unsecured indebtedness of BlockFi and the guarantors, and rank junior to the customer liabilities. The loans bear interest at 5% per annum, payable at maturity. The debtors’ papers observe that “FTX stated in its First-Day Declaration within its bankruptcy filing that BlockFi borrowed $250 million of FTT,” but BlockFi says that statement is incorrect. The debtors state that FTX refused a request to draw an additional $125 million under the agreement on Nov. 8.
- Preferred stock: BlockFi has 10 series of preferred stock. As of the petition date, there are 45,312,958 outstanding shares held by various institutional investors. BlockFi’s outstanding preferred shares are as follows:
- Equity: BlockFi has two types of common equity: common stock and special voting stock. As of the petition date, BlockFi has 6,508,898 shares and 1 share of common stock and special voting stock outstanding, respectively. Valar Fund V LP holds 19% of BlockFi Inc.’s equity, according to the petition.
Events Leading to the Bankruptcy Filing
Renzi’s first day declaration summarizes the events leading to BlockFi’s bankruptcy filing with the following timeline:
(Click HERE to enlarge.)
Renzi distills BlockFi’s 2022 year into “two acts that culminated in these filings: first, the overall cryptocurrency industry incidents that led BlockFi to seek additional liquidity, which was ultimately provided by FTX, and second, the collapse of FTX.”
Renzi points to the downturn in the crypto industry in 2022, marked by the Terra Luna collapse, a 65% decline in Bitcoin prices since January and insolvency proceedings commenced by 3AC, Voyager, Celsius and ultimately FTX, which he says combined to prompt “investor pessimism” and “led significant numbers of BlockFi’s clients to withdraw from its product offerings,” illustrated as follows:
“BlockFi had no direct exposure to Celsius, Luna, Terra, or Voyager, outside of offering clients facing BlockFi International the ability to trade Luna on its retail trading platform,” says Renzi (emphasis added). The declaration adds that BlockFi “took swift action to de-risk itself of exposure to 3AC, but could not totally evade the harm,” calling 3AC “one of BlockFi’s largest borrower clients” whose collapse “led to material losses for BlockFi.”
Although BlockFi “was able to withstand the loss from 3AC and other borrowers and process all customer withdrawals within the normal periods set forth in its customer agreements,” the declaration continues, the company “prudently sought additional liquidity to protect its client accounts into the indefinite future.”
Initial efforts to obtain equity financing from third-party investors were unsuccessful because of market conditions, says Renzi, leading the company to pursue alternatives. The process led to “an offer from FTX to essentially backstop customer withdrawals,” under which FTX US committed to loan BlockFi “up to $400 million notional amount of cryptocurrencies” “on a junior basis to BlockFi’s obligations to its clients.” The FTX US loan was accompanied by the option for FTX US to acquire BlockFi, which FTX US would have been able to exercise “as early as July 2023.” Renzi says the FTX transaction was supported by 89% of BlockFi’s shareholders.
Renzi continues that the FTX transaction came with “steep costs on BlockFi personnel and shareholders, explaining that the company’s executives and employees “were required to (and did) sacrifice hundreds of millions of dollars of their own equity value.” BlockFi ultimately accepted the deal because “client protection remains paramount” for the company, says Renzi. In addition, the declaration continues, BlockFi “significantly reorganized its workforce,” reducing employee headcount by over 20% “in a further effort to protect client value and chart a return to profitability.”
The support from FTX, “with its highly visible brand,” “bolstered customer confidence in the strength and safety of BlockFi’s platform,” says the declaration, adding that “throughout the summer of 2022, BlockFi maintained its operations while several other trading platforms and exchanges were forced to declare bankruptcy.”
But “FTX’s apparent ‘rescue’ was short-lived,” says Renzi, turning to “Act Two,” the collapse of FTX.
Prior to the transaction, BlockFi “acted as a lender” to Alameda “starting in 2019” and traded on the FTX platform “starting in 2021.” The loans to Alameda “have varied over time” and typically consisted of digital assets - primarily Bitcoin and Ethereum - and USD-denominated stablecoins, says the declaration. Renzi adds that as part of the company’s regular credit evaluation process, BlockFi received financial reporting from Alameda and held “regular dialogue” with its staff, “who made ongoing representations regarding its financial standing, significant equity capital, and unencumbered assets on Alameda’s balance sheet.”
Renzi details the events surrounding the FTX/Alameda “death spiral,” beginning with the Nov. 2 leak of Alameda’s balance sheet, which showed that approximately $5.8 billion of $14.6 billion of assets reported consisted of FTX’s proprietary FTT token, and culminating in FTX/Alameda’s chapter 11 filing and new FTX CEO John Ray’s statements regarding “complete failure of corporate controls” and “complete absence of trustworthy financial information.”
In response to the FTX collapse, says Renzi, BlockFi took “several proactive measures to attempt to limit its exposure to FTX and Alameda through a combination of margin calls and recalls of open-term loans.” In early November, BlockFi requested additional borrowing under the FTX loan agreement, “which was not honored,” and thereafter Alameda “defaulted on approximately $680 million of collateralized loan obligations to BlockFi, the recovery on which is unknown.”
On Nov. 10, to address the resulting liquidity shortage, BlockFi decided to “limit platform activity,” including pausing customer withdrawals. The company engaged restructuring advisors after FTX’s Nov. 11 filing and ultimately determined to seek bankruptcy relief.
“In preparation for these chapter 11 cases,” says the declaration, “BlockFi took steps to liquidate certain of its owned cryptocurrency to bolster available cash to fund its business and administrative costs.” The company “was able to raise $238.6 million of additional cash” through this process, “for a total unencumbered cash position as of the Petition Date of $256.5 million.”
Background
BlockFi was founded in 2017 by Zac Prince and Flori Marquez. The company never launched its own token to raise funds, instead relying on traditional venture capital. Between 2019 and March 2022, BlockFi’s total trading volume “grew from $2 million to more than $23 billion as of March 2022 (on an LTM basis), while deployable assets grew from $345 million to $14.8 billion and gross loan originations expanded from $687 million to more than $47 billion.” The company holds 47 licenses for lending, money transmission, operations and related services by 32 states and Washington, D.C., and “received a separate Class F Digital Business Assets License from Bermuda,” says the declaration.
BlockFi has retail and institutional clients. For retail clients, the debtors offer BlockFi interest accounts (through which clients can earn interest on supported digital assets), a private client program, retail client loans (through which clients can borrow U.S. dollar or stablecoins secured by certain types of digital assets collateral), trading of digital assets supported by BlockFi and a rewards card program (which was terminated by Visa on Nov. 16, according to the declaration).
In addition, BlockFi offers customer wallet accounts, which are to be funded either by transferring supported digital assets from a personal wallet to a wallet address provided by BlockFi, which would then record the digital assets to the customer wallet account, or by transferring U.S. dollar fiat currency to the company’s account at Silvergate Bank, which is used to purchase supported digital assets recorded in the customer wallet account.
Institutional clients can also open a BlockFi wallet to store digital assets or earn interest through interest earning accounts, and are also offered a “custom suite” of services, including custom trading services.
According to the declaration, the BlockFi wallet terms of service provide that the “‘title to the cryptocurrency held in your BlockFi Wallet shall at all times remain with you and shall not transfer to BlockFi,’” and the debtors say that they “intend to seek authority to honor client withdrawal requests from Customer Wallet Accounts during the early stages of these chapter 11 cases” (emphasis added).
In contrast, the debtors assert they have the right to “redeploy” and otherwise “pledge, repledge, hypothecate, [or] rehypothecate” assets under the company’s other retail based programs - the BlockFi Interest Accounts, the BlockFi Private Client and Retail Client Loans.
In 2021, the SEC, along with several state regulators, sent inquiries regarding whether BlockFi’s interest-bearing accounts were securities requiring registration. BlockFi resolved these disputes through a settlement, including agreeing to stop offering the then-existing interest-bearing accounts to U.S. clients. Thereafter, BlockFi developed a new product - “BlockFi Yield,” and prepared a Form S-1 to be registered with the SEC.
BlockFi claims it is an “industry leader in transparency,” and posts a quarterly “transparency report” to update clients about assets (the latest report is HERE). “BlockFi was forthright about what it would and would not do with funds on its platform - in stark contrast to others reported to have done the opposite,” the first day declaration states.
BlockFi touts that it is “the only cryptocurrency platform to have reached such a settlement with the SEC regarding an interest-bearing cryptocurrency account product and pursued the appropriate regulatory process for approval.”
The declaration describes the company’s “well-developed, transparent risk management procedures and policies,” which Renzi says have been “enhanced and updated over time as BlockFi has grown and learned from its accumulated experience and expertise.” Recognizing the need for “better controls” after sustaining losses in 2020 and early 2021, the declaration states that BlockFi “reorganized its risk governance, hired a new risk officer and risk management staff, and enhanced the transparency of its procedures and risk protocols.” The BlockFi board also established an audit and risk committee to, among other things, oversee the audit of company financial statements by an independent accounting firm, evaluate internal controls and review related-party transactions.
Renzi says that the risk management team is “independent” from the core business and includes “veterans of the traditional financial industry with decades of experience in identifying and managing risk in credit and trading operations.”
Before the petition date, the debtors appointed independent directors or managers, as follows:
The declaration includes the below organizational chart for the debtors:
(Click HERE to enlarge.)
| 10 Largest Unsecured Creditors | |||
| Creditor | Location | Claim Type | Amount |
|---|---|---|---|
| Ankura Trust Co. | Fairfield, Conn. | Indenture | $ 729,036,246 |
| West Realm Shires Inc. | Dover, Del. | Loan | 275,000,000 |
| Unnamed Client | NA | Client | 48,561,400 |
| Securities and Exchange Commission | New York | Settlement | 30,000,000 |
| Unnamed Client | NA | Client | 27,930,663 |
| Unnamed Client | NA | Client | 25,531,937 |
| Unnamed Client | NA | Client | 16,450,930 |
| Unnamed Client | NA | Client | 10,092,477 |
| Unnamed Client | NA | Client | 9,130,266 |
| Unnamed Client | NA | Client | 6,500,000 |
The case representatives are as follows:
| Representatives | |||
| Role | Name | Firm | Location |
|---|---|---|---|
| Debtors' Co-Counsel | Joshua A. Sussberg | Kirkland & Ellis |
New York |
| Christine A. Okike |
|||
| Debtors' Co-Counsel | Richard S. Kanowitz |
Haynes and Boone |
New York |
| Kenric D. Kattner |
|||
| Charles M. Jones II | |||
| Debtors' Co-Counsel (Local) |
Michael D. Sirota |
Cole Schotz | Hackensack, N.J. |
| Warren A. Usatine |
|||
| Debtors' Financial Advisor | Mark A. Renzi | Berkeley Research Group |
Boston |
| Debtors' Investment Banker | NA | Moelis & Co | New York |
| Debtors' Claims Agent | Benjamin J. Steele | Kroll | New York |
| U.S. Trustee | Jeffrey M. Sponder | Office of the U.S. Trustee |
Newark, N.J. |
Plan
A chart of the plan’s classes, along with their impairment status and voting rights, is shown below:
Treatment of Claims and Interests
The debtors’ plan sets forth the following classification of and proposed distributions to holders of allowed claims and interests:
- Class 1 - Secured tax claims:
- Holders of allowed secured claims would receive, at the option of the applicable debtor, payment in full in cash or other treatment rendering such holder’s claim unimpaired.
- Holders of allowed secured claims would receive, at the option of the applicable debtor, payment in full in cash or other treatment rendering such holder’s claim unimpaired.
- Class 2 - Other priority claims:
- Holders of allowed other priority claims would receive, at the option of the applicable debtor, payment in full in cash or other treatment rendering such holder’s claim unimpaired.
- Holders of allowed other priority claims would receive, at the option of the applicable debtor, payment in full in cash or other treatment rendering such holder’s claim unimpaired.
- Class 3-a - BlockFi Inc. account holder claims:
- In the event of a reorganization, account holder claims in the class would receive a pro rata share of the “cash allocation” (cash held at each debtor) and the “equity allocation” (100% of new common stock less the “equity allocation pool” to be distributed to general unsecured creditors). The respective portions of the distribution would depend on each holder’s “cash election” (currently capped at “[●]%” of the equity election) and “equity election” (currently capped at “[●]%” of the equity election).
- In the event of a sale transaction, account holder claims in the class would receive a pro rata share of the sale proceeds in the event that Class 1 and Class 2 claims are paid in full.
- Class 3-b - BlockFi International Ltd. account holder claims:
- In the event of a reorganization, account holder claims in this class would receive a pro rata share of the “cash allocation,” the “coin allocation” (coins held at each debtor) and the “equity allocation.” The respective portions of the distribution would depend on each holder’s “cash election,” “coin election” (currently capped at “[●]%” of the equity election) and “equity election.”
- In the event of a sale transaction, account claims in the class would receive a pro rata share of the sale proceeds in the event that Class 1 and Class 2 claims are paid in full.
- Class 3-c - BlockFi Investment Products LLC account holder claims:
- In the event of a reorganization, account holder claims in this class would receive a pro rata share of the “cash allocation” and the “equity allocation.” The respective portions of the distribution would depend on each holder’s “cash election” and “equity election.”
- In the event of a sale transaction, account claims in the class would receive a pro rata share of the sale proceeds in the event that Class 1 and Class 2 claims are paid in full.
- Class 3-d - BlockFi Lending LLC account holder claims:
- In the event of a reorganization, account holder claims in this class would receive a pro rata share of the “cash allocation” and the “equity allocation.” The respective portions of the distribution would depend on each holder’s “cash election” and “equity election.”
- In the event of a sale transaction, account claims in the class would receive a pro rata share of the sale proceeds in the event that Class 1 and Class 2 claims are paid in full.
- Class 3-e - BlockFi Lending II LLC account holder claims:
- In the event of a reorganization, account holder claims in this class would receive a pro rata share of the “cash allocation” and the “equity allocation.” The respective portions of the distribution would depend on each holder’s “cash election” and “equity election.”
- In the event of a sale transaction, account claims in the class would receive a pro rata share of the sale proceeds in the event that Class 1 and Class 2 claims are paid in full.
- Class 3-f - BlockFi Services, Inc. account holder claims:
- In the event of a reorganization, account holder claims in this class would receive a pro rata share of the “cash allocation” and the “equity allocation.” The respective portions of the distribution would depend on each holder’s “cash election” and “equity election.”
- In the event of a sale transaction, account holder claims in the class would receive a pro rata share of the sale proceeds in the event that Class 1 and Class 2 claims are paid in full.
- Class 3-g - BlockFi Trading LLC account holder claims:
- In the event of a reorganization, account holder claims in this class would receive a pro rata share of the “cash allocation” and the “equity allocation.” The respective portions of the distribution would depend on each holder’s “cash election” and “equity election.”
- In the event of a sale transaction, account holder claims in the class would receive a pro rata share of the sale proceeds in the event that Class 1 and Class 2 claims are paid in full.
- Class 3-h - BlockFi Ventures LLC account holder claims:
- In the event of a reorganization, account holder claims in this class would receive a pro rata share of the “cash allocation” and the “equity allocation.” The respective portions of the distribution would depend on each holder’s “cash election” and “equity election.”
- In the event of a sale transaction, account holder claims in the class would receive a pro rata share of the sale proceeds in the event that Class 1 and Class 2 claims are paid in full.
- Class 3-i - BlockFi Wallet LLC account holder claims: Holders would receive a pro rata share of all coins at debtor BlockFi Wallet.
- Class 4-a-i - general unsecured claims: Holders of claims against debtors BlockFi Inc., BlockFi International Ltd., BlockFi Investment Products LLC, BlockFi Lending LLC, BlockFi Lending II LLC, BlockFi Services Inc., BlockFi Trading LLC, BlockFi Ventures LLC and BlockFi Wallet LLC would each receive a pro rata share of cash or the “equity allocation pool,” defined as “the maximum aggregate amount of Equity to be distributed to holders of Allowed General Unsecured Claims.”
- Class 5 - FTX loan facility claims: Canceled and extinguished as of the effective date without any distribution.
- Class 6 - Section 510(b) claims: Section 510(b) claims, “if any,” would be canceled without distribution.
- Class 7 - Intercompany claims: Intercompany claims would be, at the option of the applicable debtor, either reinstated, converted to equity or otherwise set off, settled, distributed, contributed, canceled or released, in each case in accordance with the restructuring transactions memorandum.
- Class 8 - Intercompany interests: Intercompany interests would be, at the option of reorganized BlockFi, either reinstated, set off, settled, addressed, distributed, contributed, merged, canceled or released, in each case in accordance with the restructuring transactions memorandum.
- Class 9 - Existing preferred equity interests: Preferred equity interests would be canceled without distribution.
- Existing preferred equity interests are defined to include: “(a) Series Seed Preferred, (b) Series Seed 2 Preferred Stock, (c) Series A-1 Preferred Stock, (d) Series A-2 Preferred, (e) Series A-3 Preferred, (f) Series B Preferred Stock, (g) Series C Preferred Stock, (h) Series D Preferred Stock, (i) Series E Preferred Stock, (j) Series E-1 Preferred Stock.”
- Existing preferred equity interests are defined to include: “(a) Series Seed Preferred, (b) Series Seed 2 Preferred Stock, (c) Series A-1 Preferred Stock, (d) Series A-2 Preferred, (e) Series A-3 Preferred, (f) Series B Preferred Stock, (g) Series C Preferred Stock, (h) Series D Preferred Stock, (i) Series E Preferred Stock, (j) Series E-1 Preferred Stock.”
- Class 10 - Existing equity interests: Existing equity interests in BlockFi would be canceled without distribution.
Other Plan Provisions
The plan notes that the release and exculpation provisions and related definitions “remain subject to the outcome of an ongoing investigation by the independent directors at the applicable Debtor entities.” In its current form, the plan states that FTX would not be a released party.
At the effective date, the existing board of directors will appoint the members of a new board. The identities of the new board members will be disclosed in a forthcoming plan supplement.
Adversary Complaint v. Emergent Fidelity Technologies, ED&F Man Capital Markets
Along with the petitions, BlockFi Inc. and several affiliates filed an adversary complaint today against Emergent Fidelity Technologies Ltd., an entity affiliated with FTX founder Bankman-Fried and Alameda, and ED&F Man Capital Markets Inc. seeking to enforce the terms of a Nov. 9 pledge agreement and to recover collateral.
According to the complaint, the pledge agreement was given in consideration for BlockFi entering into an amendment and forbearance agreement on Nov. 9, pursuant to which BlockFi agreed to forbear from exercising rights and remedies due to “multiple” events of default. Emergent guaranteed the payment obligations of the borrower under the forbearance agreement, with the guaranty secured by a first lien in favor of BlockFi in all of Emergent’s right and interest in the collateral, including certain shares of common stock. Emergent was required to deliver all collateral shares to BlockFi in accordance with the pledge agreement but failed to do so, according to the complaint.
The debtors are seeking injunctive relief directing that Emergent and/or EDFM immediately transfer the collateral to a neutral party and eventually BlockFi. The debtors also request that EDFM be ordered not to make any disbursement from the collateral.
Further, the debtors seek damages for breach of the pledge agreement, declaratory relief and attorneys’ fees. The debtors also argue that Emergent has been “unjustly enriched by ignoring its obligations under the Pledge Agreement and continuing to allegedly maintain ownership rights in the Collateral.”
The debtors also filed a related motion seeking an order directing that the collateral be transferred to a neutral broker or escrow or enjoining the defendants from transferring or using the collateral pending final resolution of the turnover claims.
Other Motions
The debtors also filed various standard first day motions, including the following:
- Motion for joint administration
- The cases will be jointly administered under case No. 22-19361.
- Motion to establish trading procedures
- BlockFi seeks to establish trading procedures for its common stock to be able to object to and prevent transfers if necessary to preserve net operating losses. The debtors have about $566.8 million in federal NOLs as of Dec. 31, 2021.
- Motion to pay employee wages and benefits
- The debtors have 292 employees (of which 288 are based in the U.S., two in Bermuda and two in Singapore) and 82 independent contractors abroad.
- The debtors sent Worker Adjustment and Retraining Notification Act, or WARN Act, notices to approximately two-thirds of employees and independent contractors before the petition date.
- The debtors’ monthly average compensation and benefits obligations are approximately $6.1 million, and they owe $2.2 million as of the petition date.
- Motion to pay critical vendors, shippers and miscellaneous lien claimants
- The debtors owe approximately $1.3 million to critical vendors, shippers and miscellaneous lien claimants, and estimate that they will need to pay $1.1 million of the obligations during the interim period.
- Motion to use cash management system
- The company has bank accounts with Signature Bank, BCB Bank, Capital Union Bank, Silicon Valley Bank and Silvergate Bank.
- Motion to maintain insurance programs
- Motion to pay taxes and fees
- The debtors seek authorization to pay income and franchise taxes and certain customer garnishments.The debtors estimate that $450,000 of income and franchise taxes will come due within the year following the petition date.
- Motion to provide utilities with adequate assurance
- Motion to extend time to file schedules to Jan. 11, 2023
- Motion to file consolidated list of creditors
- Motion to establish case management procedures
- Motion to enforce worldwide automatic stay
- Motion to approve debtors’ key employee retention programs
- The debtors seek approval of a key employee retention plan, or KERP, and target retention program, or TRP, for non-insider employees in two categories - tier 1 (50% of base salary) and tier 2 (10% of base salary). The KERP covers 95 employees with a total cost of $9.9 million, and the TRP covers 32 employees with a total cost of $2.4 million.
- Application to appoint Kroll as claims and noticing agent
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