BlockFi

What did it do?

BlockFi was a digital asset lending company based in Jersey City, New Jersey, founded in 2017 by Zac Prince and Flori Marquez. Through lending products backed by crypto assets, it brought bank-like services to the crypto world. At one point it reached a valuation of $3 billion.

Why did it shut down?

In February 2022 the company reached a $100 million settlement with regulators for failing to register its lending products. In July 2022 FTX came to its aid with a deal that included a $400 million credit facility and an option to buy BlockFi for up to $240 million. When FTX collapsed in November 2022, BlockFi halted withdrawals and disclosed significant exposure to FTX. On 28 November it filed for Chapter 11 with more than 100,000 creditors. It emerged from bankruptcy in October 2023 but decided to wind down all its remaining operations.

The story

In mid-November 2022 BlockFi's executives realised the company's fate was no longer in their own hands. FTX, which had thrown them a lifeline a few months earlier, had gone bankrupt, and BlockFi had serious exposure to the exchange. Two weeks later, with a bankruptcy filing listing more than 100,000 creditors, the company became another victim of the crypto winter.

BlockFi was founded in 2017 by Zac Prince and Flori Marquez and settled in Jersey City, New Jersey. The company offered lending products that translated crypto assets into the language of traditional finance and became one of the faces of the crypto world's rapid expansion towards banking. Its growth took it to a valuation of $3 billion. That rapid expansion, however, was also being watched with concern in Washington; in February 2022 the company signed a $100 million settlement for failing to register its lending products.

As the crypto market was shaken in the summer of 2022, BlockFi struggled too. In July FTX struck a deal that gave the company a $400 million credit facility and included an option to buy BlockFi for up to $240 million. At the time the move looked like salvation; in reality it tied BlockFi's future to a single counterparty. When FTX went bankrupt in November, BlockFi halted withdrawals, disclosed on 14 November that it had significant exposure to FTX and filed for Chapter 11 on 28 November.

The bankruptcy brought fresh surprises. When Silicon Valley Bank collapsed in March 2023, it emerged that BlockFi had around $227 million of uninsured funds at the bank. CEO Zac Prince testified as a witness in the Sam Bankman-Fried trial and said he believed they would not have gone bankrupt had they not lost access to their funds at FTX. In October 2023 the company emerged from bankruptcy but began closing all its remaining operations and returning assets to customers; it continued to pursue its claims in the FTX and Three Arrows Capital bankruptcies.

BlockFi's story is a reminder that a hand extended in one crisis can become the source of the next. The rescue deal bought the company a few months but piled all its risk onto a single institution, and when that institution fell, BlockFi had nothing else to hold on to.

Lessons for founders

• Do not tie all your risk to the single investor who rescues you in a crisis; if the rescuer goes under, you go down with it.
• Do not concentrate customer funds at a single bank or counterparty; at the time of its bankruptcy BlockFi even had $227 million of uninsured money at Silicon Valley Bank.
• Be clear about which regulations your financial product falls under before you grow; a settlement paid later erodes both cash and reputation.

Sources

1. BlockFi (Wikipedia)
2. BlockFi files for bankruptcy as FTX fallout spreads (CNBC, 2022-11-28)
3. Crypto lender BlockFi emerges bankruptcy (Reuters, 2023-10-24)
4. BlockFi, a crypto firm, reaches a $100 million settlement for failing to register loan products (The New York Times, 2022-02-14)

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