Bankrupt cryptocurrency lender BlockFi is currently in a legal battle to prevent bankrupt firms FTX and Three Arrows Capital (3AC) from retrieving hundreds of millions of dollars to pay back their own creditors. BlockFi argues that its creditors should not be pushed to the back of the line because FTX allegedly misappropriated $5 billion that BlockFi had lent it.
In a filing to a New Jersey bankruptcy court on August 21st, BlockFi claimed that FTX’s attempt to recover over $5 billion of claims against BlockFi’s estates would come at the expense of BlockFi’s clients and other legitimate creditors. BlockFi also asserted that FTX provided $400 million to the company in June 2022 in addition to purchasing BlockFi equity under a loan agreement. However, BlockFi argued that this arrangement was not a standard loan agreement, but rather an unsecured, 5-year term with below-market interest rates, and repayments were not due until the maturity of the firm.
According to BlockFi, FTX’s investment was essentially a “gamble” that BlockFi creditors should not be responsible for. BlockFi emphasized that just because FTX’s fraudulent actions caused their bet to fail does not mean BlockFi’s creditors should refund the purchase price.
BlockFi currently owes up to $10 billion to over 100,000 creditors, including $1 billion to its three largest creditors and $220 million to bankrupt crypto hedge fund 3AC. Additionally, BlockFi accused 3AC of committing fraud with the borrowed money and argued that it should not be entitled to potential repayment. BlockFi believes that the litigation with FTX, 3AC, and other firms could cost the company up to $1 billion, which would impact the amount owed to its creditors.
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It is worth noting that several BlockFi creditors previously accused the company of overlooking multiple red flags before transacting with FTX and its trading firm, Alameda Research, in the months leading up to FTX’s collapse in November 2022. Despite these accusations, creditors reached a settlement with BlockFi last month to proceed with a repayment plan.
BlockFi filed for Chapter 11 bankruptcy on November 28th, shortly after FTX filed for bankruptcy. The ongoing legal battle between BlockFi, FTX, and 3AC highlights the complex and contentious nature of resolving financial disputes within the cryptocurrency industry.
In conclusion, BlockFi is fighting to protect its creditors from being pushed to the back of the line while FTX and 3AC seek to retrieve funds to pay back their own creditors. The outcome of this legal battle will have significant implications for all parties involved and may shape future bankruptcy proceedings in the cryptocurrency sector.
