BlockFi, one of the world’s largest crypto lenders, has filed for Chapter 11 bankruptcy in the US, joining a crushing line-up of crashed crypto firms including Celsius, Voyager, 3AC and of course the headline-hitting FTX, which seemingly started a contagion effect earlier this month.
The bankruptcy filing for BlockFi suggests that its liabilities could extend from $1-10 billion – a far cry from the $50 billion estimated outstanding for FTX, but still a significant blow to investors reeling from the continued fall-out.
More than anything, the latest failure reveals the weakness of infrastructure across the digital assets industry – and the lack of checks and balances to control bad business practice. Although the crypto space is still largely retail, many of these firms had made moves into the institutional space, seeking to set up prime platforms in order to encourage professional involvement.
BlockFi, for example, operated a BlockFi Prime division, designed specifically to facilitate institutional trading of digital assets.
In a statement released yesterday, the firm laid the blame squarely at FTX’s door, saying: “This action follows the shocking events surrounding FTX and associated corporate entities, and the difficult but necessary decision we made as a result to pause most activities on our platform.”
Since pausing activities, the firm claimed to have “explored every strategic option” before resorting to Chapter 11 bankruptcy as the best way to “stabilise the business and provide BlockFi with the opportunity to consummate a reorganisation plan”.
Others impacted by the fallout include Genesis, the crypto broker founded by the Facebook-famous Winklevoss twins, which suspended withdrawals last week blaming the “unprecedented market turmoil” caused by FTX, which had resulted in abnormally high withdrawal requests.
But FTX wasn’t the start of this contagion, which has its roots far further back. When Singapore-based Crypto hedge fund Three Arrows collapsed earlier this year, it sent shock waves through the market that are still seeing a fallout – for example, the failed hedge fund defaulted on a $670 million loan that contributed to the July bankruptcy of digital currency lender Voyager Digital, which FTX then agreed to buy for $1.4 billion, before plunging into its own disaster.
Other firms, including Binance and crypto trading platform CrossTower, are now understood to be preparing bids for the bankrupt firm. Binance has also set up a $1 billion industry recovery fund to support firms struggling with the sudden loss of liquidity, while others (including CrossTower) are planning their own offerings.
For those firms with practices (and balance sheets) strong enough to withstand the storm, therefore, this could be the ideal opportunity to snap up some bargains – making for much-needed consolidation across the fragmented crypto brokerage space. Could we start to see some giants emerge that are finally able to offer the security, stability and services that institutional clients need in order to rebuild their confidence?
The timing is apposite for The TRADE’s first ever digital assets roundtable, being held in London on 1 December 2022. Distributed post-event in both video and digital form, watch this space for a detailed discussion of what is needed to overcome the barriers to institutional involvement in this most promising yet punishing of markets.