BlockFi, the cryptocurrency lending platform, finds itself in dire straits as recent documents reveal its downfall was not solely caused by the collapse of FTX and Alameda Research. Instead, it was the company’s mismanagement and neglect of warnings regarding potential risks tied to these entities. This has been exposed in a filing by the Official Committee of Unsecured Creditors on July 14.
On November 10, 2022, BlockFi halted withdrawals, attributing the decision to the alleged collapse of FTX and Alameda Research. The lack of clarity surrounding these firms was cited as the reason for the disruption, leading to BlockFi’s subsequent bankruptcy filing.
However, the latest filing from the ongoing investigation conducted by the creditors’ committee paints a different picture. While acknowledging that Alameda/FTX’s downfall may have triggered BlockFi’s demise, the committee contends that the company’s failure stemmed from long-standing business practices and decisions made by its management.
In a noteworthy section of the filing, the committee alleges that senior management at BlockFi deliberately disregarded or dismissed warnings against extending substantial loans to Alameda Research, which were secured by FTX’s FTT token as collateral. Shockingly, BlockFi CEO Zac Prince allegedly instructed team members to “get comfortable” with this risky allocation of funds.
The filing further criticizes BlockFi’s overall business model, branding it as deeply flawed. It emphasizes that the company took on unreasonable risks that ultimately resulted in catastrophic losses. The committee challenges previous claims suggesting that BlockFi debtors are in a better position compared to FTX debtors. Additionally, it highlights the fact that despite presenting itself as similar to regulated and insured small banks, BlockFi was not actually a regulated lending institution.
During the bankruptcy proceedings in January 2023, it was unveiled that BlockFi had exposure to both FTX and Alameda Research, totaling $1.2 billion—an amount significantly larger than what the company had initially reported.
Adding to BlockFi’s troubles, FTX and other companies have expressed their opposition to the company’s bankruptcy plans through court filings in July. This opposition may potentially impede BlockFi from executing its proposed plan.
As BlockFi continues to navigate through the bankruptcy proceedings, initial estimates suggest that the company owes over $1 billion to more than 100,000 creditors. The future remains uncertain for the cryptocurrency lending platform as it grapples with the consequences of its ill-fated decisions and the fallout from its association with FTX and Alameda Research.
BlockFi’s demise appears to have been a result of poor management decisions and a flawed business model rather than being solely triggered by the collapse of FTX and Alameda Research. The ramifications of these missteps have pushed the company into bankruptcy proceedings, leaving numerous creditors uncertain about the fate of their investments.
