The news had been circulating in the crypto industry for days: BlockFi is insolvent and had to file for Chapter 11.
On 10 November, in the midst of FTX’s collapse, they had declared that withdrawals were still active, but as early as the next day they announced their indefinite suspension.
On 14 November they declared that they had sufficient liquidity to try to keep going, but as early as 23 November they withdrew this statement.
Yesterday the official announcement of the Chapter 11 application
Crypto news: BlockFi files for Chapter 11
The so-called Chapter 11 is literally the 11th chapter of the US bankruptcy law. It is actually the main provision of that law.
Its specific feature is to allow companies that use it to kick off a restructuring process despite filing for bankruptcy.
In other words, filing for Chapter 11 means that the company is insolvent and de facto declares bankruptcy because it no longer has sufficient resources to repay all of its debts as they fall due, but not with the primary objective of being liquidated and closed as soon as possible.
This does not a priori rule out the possibility that the company may end up being liquidated, but if nothing else it leaves the doors open to a possible restructuring, should it be possible.
It is worth noting that unfulfilled customer withdrawals are to be considered debts for all intents and purposes, so the fact that the company has had to suspend them indefinitely is sufficient to say that it is insolvent and therefore in bankruptcy.
In light of this it is possible to say that perhaps its management team was aware as early as 11 November that there was a risk of having to file for insolvency. Despite this they publicly stated on the 14th that they had sufficient liquidity to even try to move forward.
This attitude suggests it is possible that they lied, making the restructuring hypothesis more theoretical than plausible at this point.
Then again, so far all crypto companies that have filed for Chapter 11 have then ended up in liquidation.
The alternative to Chapter 11 is Chapter 7, which is to permanently cease operations and place all assets in the hands of a trustee who will proceed with the liquidation, distributing the proceeds to creditors. As a matter of fact, BlockFi’s activities to date have already ceased, although the use of Chapter 11 in theory could also allow them to recover, provided the funds are found to cover the shortfalls.
This is because Chapter 11 is a reorganization procedure, not a liquidation procedure, with the purpose of restoring the company to health. The reorganization and recovery process can take months or years, and can result in exit from Chapter 11 and resumption of operations if successful, or Chapter 7 in the event of bankruptcy.
BlockFi’s bankruptcy filing in this week’s crypto news
In the official statement released yesterday, the company states that they have initiated the restructuring process to stabilize the business and maximize value for all customers and stakeholders.
It therefore does not state that they intend to reopen operations anytime soon, partly because the outcome of the restructuring procedure at this time is uncertain.
They also reveal that eight subsidiaries are involved in this restructuring, and that the Chapter 11 petition has been made to the US Bankruptcy Court for the District of New Jersey.
In the statement, they seem to blame their insolvency on FTX, in other words, on having uncollectible debts with them. They add:
“Due to the recent collapse of FTX and its ensuing bankruptcy process, which remains ongoing, the Company expects that recoveries from FTX will be delayed.”
BlockFi‘s financial advisor, Mark Renzi of the Berkeley Research Group, says that at the time of FTX’s collapse, BlockFi’s management team and board of directors took action to protect clients.
It is possible that he is referring to the 11 November decision to suspend withdrawals, but the previous day, when the FTX collapse had already begun, the company instead publicly stated that it had not blocked them.
The statement also reveals that BlockFi is filing a series of motions with the bankruptcy court to get permission to continue its operations.
However, these are not aimed at resuming services provided to customers, but primarily to pay salaries to employees so as to “ensure the company retains trained internal resources for business.”
They also state that they have initiated an internal plan to significantly reduce expenses, including labor costs.
In fact, they specify in the statement that customer services continue to be suspended, despite the fact that the company has $256.9 million in cash. However, this money will be used to provide sufficient liquidity to support the operations of the restructuring process.
So it is presumable that customer services can only resume if the restructuring plan is successful or when it is clear that it is moving in that direction.
While BlockFi’s main debtor is probably the bankrupt FTX, some surprises appear in the list of creditors.
Debtors are those who are supposed to pay money back to the company, while creditors are those to whom the company itself must repay the funding it has granted. All users of its platform who still had funds on deposit at the time withdrawals were suspended are creditors.
But creditors also include other companies that were not necessarily users of the platform, and were simply waiting to be paid for other reasons.
One major customer who had funds on deposit has a claim against the company of as much as $48 million, but it is not the largest creditor.
The largest creditor is Ankura Trust Company, which has an impressive claim of nearly $730 million.
The second largest creditor is West Realm Shires, with $275 million, which appears to be connected with FTX US.
FTX US is the company that operated the US exchange FTX.US, while FTX is the Bahamian company that operated the international exchange FTX.com.
So while FTX is probably the largest debtor, FTX US is the second largest creditor.
Interestingly, in fourth place among BlockFi’s creditors is the New York Securities & Exchange Commission (SEC), with $30 million. The stated nature of this claim is “settlement.”
All other major creditors are customers.
Although the company’s intent at present is to restructure its operations probably to try to get back into operation sooner or later, at this time such a scenario actually seems unlikely.
In fact, since the company is no longer producing income, and therefore profits, it would take large financiers to cover the budget holes and get it back on its feet.
Meanwhile, they are laying off many employees, keeping only key ones. However, staff reduction had already begun in June, due to the sharp drop in profits, so the situation had been in the balance for some time.
It actually turns out to be really difficult to imagine how to restructure a company under such conditions to the point where it can really get going again. Probably the only real solution would be a purchase by another company interested in taking over its operations or market share.
In this regard, it is worth mentioning that there are already similar initiatives in place for other failing crypto companies, such as Voyager, so the possible suitors for the takeover of BlockFi are reduced.