Crypto lender BlockFi blocks withdrawals as FTX declares bankruptcy

11/16/2022 / By Roy Green

The crumbling crypto industry has claimed another likely victim in BlockFi, a digital-asset lender worth $10 billion once, but is now barely functioning.

With FTX announcing its plans to file for bankruptcy on Friday, Nov. 11, BlockFi announced via Twitter on the same day that it is “stopping client withdrawals” because of a “lack of clarity” regarding the fate of Sam Bankman-Fried’s crypto exchange empire.

More precautionary actions could be expected from BlockFi, which admitted in a statement on Monday, Nov. 14, that it also has significant exposure to FTX. BlockFi has also instructed clients not to submit any deposits, stating “that the recovery of the obligations owed to us by FTX will be delayed.”

To allay the fears of its investors, BlockFi pointed out that it “has the necessary liquidity to explore all options” so it could take “the best path forward.”

Earlier this year, the two sides reached a deal focused on a loan to and a potential acquisition of BlockFi by FTX, which is regarded as one of the industry’s major players before its sudden implosion and downward spiral.

The truth is, it’s not only FTX that reeled from the impact of the crisis encroaching the once robust industry. Virtually all crypto firms are downsizing these days, cutting on jobs and expenses, as the global market fell below $1 trillion on June 23.

BlockFi, for one, has decided to reduce by 20 percent its roster of over 850 employees.

Bitcoin, the world’s biggest cryptocurrency, has plummeted nearly 65 percent in value. On Monday it was trading at $16,500, according to CoinDesk, and analysts believe it could even go below $10,000, which would be disastrous. Ether, the world’s second most valuable cryptocurrency, is on the same rickety boat. It was trading at $1,230 on Monday, a 20 percent dip since last week.

FTX crash triggers “Lehman moment”

According to industry insiders, the FTX crash had triggered a “Lehman moment,” referring to the 2008 collapse of the investment bank that reverberated around the world.

Apart from further shrinking expectations in the crypto industry, the FTX collapse also highlighted the need for tighter controls by global regulators.

Industry leaders like Changpeng Zhao, who runs the biggest crypto exchange Binance, agree.

Speaking at a conference in Indonesia on Monday, Zhao said there is a “lot of risk” involved. “We have seen in the past week things go crazy in the industry, so we do need some regulations, we do need to do this properly,” he noted.

Binance had reached a tentative rescue plan with FTX last week, but scrapped the transaction after scrutiny of FTX’s financial standing.

BlockFi, though, remains hopeful that it can ride the storm. After all, it has experienced a bumpy journey before, when it was forced to shell out $100 million to the U.S. Securities and Exchange Commission after its subsidiary, BlockFI Lending LLC, was found to have broken the rules by offering an interest-bearing lending product without registering it to regulators. (Related: California regulator to investigate crypto companies for not disclosing risks of crypto lending activities.)

Meanwhile, more troubles are on the horizon for FTX despite the resignation of Bankman-Fried, the 30-year-old founder of the exchange who swiftly became a billionaire only to lose his “easy money” just as quickly.

On Sunday, Nov. 13, the authorities in the Bahamas, where FTX moved its headquarters from Hong Kong last year, said they were probing “potential criminal misconduct” surrounding the company’s implosion. The Wall Street Journal recently reported that the collapse of FTX was preceded by its decision to fund risky bets by Alameda to the tune of billions of dollars.

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