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Crypto lender BlockFi files for bankruptcy as FTX fallout spreads

The BlockFi website on a smartphone arranged in the Brooklyn borough of New York, US, on Thursday, Nov. 17, 2022.Gabby Jones/Bloomberg

BlockFi, a cryptocurrency lender and financial services firm, filed for bankruptcy Monday, becoming the latest company in the crypto industry hobbled by the implosion of the embattled exchange FTX.

BlockFi had been reeling since the spring, when the collapse of several influential crypto firms pushed the market into a panic, sending the value of cryptocurrencies like bitcoin plunging. In June, FTX agreed to provide the company with a $400 million credit line, which BlockFi’s chief executive, Zac Prince, said would provide “access to capital that further bolsters our balance sheet.” The deal also gave FTX the option to buy BlockFi.

But that agreement meant that BlockFi was financially entangled with FTX, and its stability was thrust into uncertainty this month after a series of revelations about corporate missteps and suspicious management at FTX. A few days after the exchange collapsed, BlockFi suspended withdrawals, explaining that it had “significant exposure” to FTX, including undrawn amounts from the credit line and assets held on the FTX platform.

BlockFi is not the first crypto lender to collapse in a devastating year for the industry. After the spring crash, in which bitcoin fell 20 percent in a week, two other lenders, Celsius Network and Voyager Digital, filed for bankruptcy.

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BlockFi, which is based in Jersey City, New Jersey, was created in 2017 and, as of last year, claimed more than 450,000 retail clients who can obtain loans in minutes, without credit checks.

“We are just at the beginning of this story,” Flori Marquez, a co-founder of BlockFi, told The New York Times in September.

But its business has attracted close scrutiny from regulators.

The Securities and Exchange Commission in February reached a $100 million settlement with BlockFi’s lending arm over registration failures, the first since the regulator warned that it would take action against cryptocurrency firms offering loans that failed to register them as securities or to register themselves as investment companies. The SEC also found that BlockFi made false and misleading statements about the level of risk in its loan portfolio and lending activity.

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The settlement was intended to give BlockFi a path to register with the SEC, which would also set an example for other crypto lenders. But cryptocurrency advocates pushed back, saying that the deal supported their claim that regulation had pushed companies like FTX offshore into places where rules are looser, which puts consumers at risk.