Creditors of BlockFi Allege Crypto Lender Fell Victim to Poor Management

A war of words between BlockFi Creditors Committee and Management

A war of words between the BlockFi Creditors Committee and the bankrupt digital asset lender’s management continued in a court filing published late Monday.

Creditors dispute BlockFi’s victim narrative

The creditors called BlockFi’s narrative that it was a victim of FTX and Alameda a “false case narrative” and blamed the firm’s failure on poor management decisions and subsequently its restructuring agents.

Questionable Financial Decisions

The creditors committee pointed out that in the days after the FTX collapse, when crypto markets plummeted, BlockFi converted around $240 million in cryptocurrency into fiat, resulting in significant financial losses and potential tax issues for customers. BlockFi then deposited the proceeds and an additional $10 million into Silicon Valley Bank (SVB), which later collapsed.

• SVB was not a depository institution of sufficient strength to meet the Bankruptcy Code’s protective requirements.
• The United States Trustee objected to estate money being deposited there.
• An arrangement was reached whereby SVB would post sufficient collateral (in the form of a bond) should there be a bank failure.
• Nobody at BlockFi followed through with this arrangement, and no bond was posted.
• The federal government stepped in to bail out all SVB depositors, including BlockFi.

Improper use of customer funds

The creditors argued that BlockFi spent $22.5 million of customer funds to purchase a $30 million insurance policy for its directors and officers.

Lost value due to liquidation

Since the lows of November 2022, bitcoin (BTC) has gained nearly 63%, according to CoinDesk market data, and creditors argue that there was nearly $100 million in value lost because of that decision to liquidate then. Notably, a portion of this document is redacted, particularly key paragraphs where the creditors explain why they believe the BlockFi team was engaged in a “false case narrative”.

Recovery depends on FTX and Alameda

In the wake of its bankruptcy spurred by FTX’s collapse, BlockFi is set to return nearly $300 million to custodial wallet users as per a recent ruling, while retaining $375 million from its interest-bearing accounts.

While the company managed to secure $4.7 million from the sale of mining rigs, significant recoveries hinge on the firm’s claims against Alameda and FTX, with around $355 million in cryptocurrency frozen on FTX and a $671 million loan to FTX’s affiliate, Alameda Research.