Bankrupt crypto lender BlockFi is reportedly trying to block attempts by FTX and Three Arrows Capital (also bankrupt) to retrieve millions of dollars to pay back their creditors.
BlockFi has claimed that, by its estimates, legal battles with FTX and Three Arrows Capital could cost its customers up to $1 billion.
BlockFi Looks To Stop FTX And 3AC Repayment
BlockFi claimed in a 21st August filing at the New Jersey bankruptcy court that its own creditors must not be pushed to the back of the line because FTX’s creditors were harmed thanks to the exchange allegedly misappropriating the $5 billion that BlockFi had initially lent it. In an attempt to safeguard the interest of its creditors, BlockFi has stated it will actively look to block attempts by FTX and Three Arrows Capital to claw back billions to pay off their own creditors. The crypto lender argued that its bankruptcy directly resulted from the fraud perpetrated by FTX and 3AC. BlockFi stated in its filing,
“FTX seeks to recover on over $5 billion of claims filed against the BlockFi estates at the direct expense of the ultimate victims of FTX’s fraud: BlockFi’s clients and other legitimate creditors. To prevent further injustice to the creditors of BlockFi’s estates, the Court should disallow the FTX Claims under the doctrine of unclean hands.”
FTX had also given $400 million to BlockFi in June 2022 in an attempt to remedy the situation. This was in addition to purchasing BlockFi equity pursuant to a loan agreement, the filing added. However, BlockFi has stated that this was not a standard loan agreement. Instead, the crypto lender has stated that it was an unsecured, 5-year term which was also well below market rates. It further added that repayments were not due until the firm would supposedly mature.
BlockFi called FTX’s investment a gamble, one that BlockFi’s creditors should not be held liable for. BlockFi stated in its argument,
“Just because FTX’s fraudulent actions caused FTX’s bet to fail does not mean BlockFi’s creditors are now somehow liable to refund the purchase price.”
BlockFi Owes Billions To Creditors
Several estimates have shown that BlockFi reportedly owes up to $10 billion to over 100,000 creditors. This figure includes $1 billion to three of its largest creditors and $220 million to bankrupt crypto hedge fund Three Arrows Capital. Three Arrows Capital’s creditors have reportedly expressed considerable frustration with the slow pace of bankruptcy proceedings.
BlockFi has argued that Three Arrows Capital, like FTX, was not entitled to repayment and claimed that the crypto hedge fund used fraudulent means to borrow the funds. Three Arrows Capital had previously taken loans from BlockFi, on which it subsequently defaulted. This led to the foreclosure on the collateral, leading to what liquidators have described as a $220 million preferential payment to BlockFi.
BlockFi’s creditors have also accused the company of ignoring several warnings and red flags when dealing with FTX and its sister concern Alameda Research, just months prior to the FTX collapse. The creditors claimed that the CEO of BlockFi ignored advice from BlockFi’s risk management team, which had stated that Alameda Research’s balance sheet primarily consisted of FTX’s own FTT token. However, the CEO dismissed such concerns and urged the risk management team to get comfortable with Alameda Research being a borrower similar to Three Arrows Capital.
“As early as August 2021, BlockFi’s risk management team was advised that Alameda’s balance sheet was largely comprised of ‘~7bb unlocked FTT and 11bb total including locked tokens based on unaudited financials. This set off alarms at BlockFi. Mr. Prince dismissed the concerns, urging the risk team to learn to ‘get comfortable [with Alameda] being a three arrows size borrower, just with FTT and other collateral types instead of GBTC shares.”
However, BlockFi’s creditors settled with the company last month on moving ahead with a repayment plan. BlockFi collapsed just weeks after FTX, filing for Chapter 11 bankruptcy on the 28th of November.
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