The price of consensual hallucination. Filing also lists $30 million SEC settlement, and huge amounts owed to unnamed “clients.”
By Wolf Richter for WOLF STREET.
And it happens again. Crypto outfit BlockFi Inc., which was founded in 2017, and eight affiliates – BlockFi Trading, BlockFi Lending, BlockFi Wallet, BlockFi Ventures, BlockFi International Ltd., BlockFi Investment Products, BlockFi Services Inc., and BlockFi Lending II – filed for Chapter 11 bankruptcy today in the US Bankruptcy Court for the District of New Jersey. BlockFi International Ltd., which is incorporated in Bermuda, filed for bankruptcy with the Supreme Court of Bermuda.
BlockFi had halted withdrawals when FTX collapsed, and at the time hired bankruptcy counsel. Any fiat and cryptos anyone had on these platforms is now part of the bankruptcy proceedings.
In the bankruptcy filing, BlockFi Inc. checked the box that said it has “more than 100,000” creditors, and it checked the box that said it owed those creditors between $1 billion and $10 billion.
On its blog, BlockFi said today that withdrawals will remain blocked, and “clients’ claims will be addressed through the chapter 11 process.” Whatever amounts, if any, clients will be able to get back will be determined by the bankruptcy court.
10 largest unsecured creditors listed in the bankruptcy filing:
- Ankura Trust Company (the trustee for BlockFi’s “Crypto Interest Accounts”): $729 million
- FTX US: $275 million
- Unnamed “client”: $49 million
- SEC for a “settlement”: $30 million
- Unnamed “client”: $28 million
- Unnamed “client”: $26 million
- Unnamed “client”: $16 million
- Unnamed “client”: $10 million
- Unnamed “client:” $9 million
- Unnamed “client”: $6 million
The $275 million that BlockFi owes FTX is part of an incestuous relationship between BlockFi and FTX entities, including an effort by FTX to bail out BlockFi, and thereby to bail itself out, after BlockFi had made a large loan to FTX affiliate Alameda Research, which collapsed.
On its website, BlockFi said it had “significant exposure” to bankrupt FTX and its bankrupt affiliates, including “obligations owed to us by Alameda, assets held at FTX.com, and undrawn amounts from our credit line with FTX.US.”
“We were shocked by the news regarding FTX and Alameda,” BlockFi said. In a modern re-make of the film noir Casablanca, the famous line would be: “We’re shocked, shocked to find that gambling and scams are going on in here.”
Speaking of which…
The $30 million if owes the SEC for a “settlement” is the remnant of a $100 million settlement with the SEC and 32 states.
In February 2022, the SEC charged BlockFi Lending LLC “with failing to register the offers and sales of its retail crypto lending product. In this first-of-its-kind action, the SEC also charged BlockFi with violating the registration provisions of the Investment Company Act of 1940.”
To settle the charges, BlockFi agreed to pay a $50 million penalty, and comply with some rules. In addition, parent BlockFi Inc. agreed to pay $50 million in fines to 32 states “to settle similar charges.”
This was the first ever crackdown by the SEC on a crypto lending platform. Nine months later, the platform filed for bankruptcy and still owes the SEC $30 million.
VC firms were big into crypto consensual hallucination:
BlockFi had raised $1.4 billion in funding in 13 rounds, including a debt financing. The biggest investors –they already kissed their investments goodbye – were, according to CrunchBase:
- $500 million: Rose Part Advisors (Series E)
- $400 million: FTX US (credit facility – see the $275 million entry above)
- $350 million: Bain Capital Ventures, Bracket Capital, DST Global Partners, Pomp Investments, and Tiger Global Management: (Series D)
- $50 million: Morgan Creek Digital: (Series C)
- $48 million: Valar Ventures (Series A and Series B). The VC fund was spun out of Thiel Capital, Peter Thiel’s company.
It’s an amazing sight to see these crypto outfits swallow up so much money from so many people who thought they were so smart and then go down in flames so fast. It could only happen because of a massive bout of what I call consensual hallucination.
But it shouldn’t be a surprise…
…no matter how “shocked” these people might now be that their money is gone. I laid this out in my podcast, THE WOLF STREET REPORT: Leverage & Interconnectedness Are Blowing Up Crypto & DeFi.
Crypto lenders Celsius Network and Voyager Digital collapsed in July. Then there is a whole slew of crypto-related companies that went public via IPO or merger with a SPAC, whose shares have now collapsed by 95% or more. And the first batch of them is warning about bankruptcy, including last week, Bitcoin miner SPAC Core Scientific, a year after going public. That companies like this could be dumped into the lap of the public speaks of the widespread “consensual hallucination” that was required to pull it off.
These crypto outfits lent to each other and used crypto tokens as collateral which then collapsed, and they bought each other’s crypto tokens which then collapsed, and they gambled with their clients’ funds on tokens that then collapsed, and they used their own artificially inflated crypto tokens as reserve capital that then collapsed, and funds were siphoned out as we now see being revealed in the FTX bankruptcy.
While these twisted inter-connections and self-boosting mechanisms were working, they all went to heaven together, but those mechanisms make for smooth and efficient contagion in the whole crypto space, and now they’re all going to heck together. Crypto should not be regulated; just let it burn off.
