Bankrupt Crypto Lender BlockFi Agrees to $100K Refund For Californian Borrowers
The California Department of Financial Protection and Innovation (DFPI) announced on March 28 that bankrupt crypto lender BlockFi has agreed to refund over $100,000 in loan payments to its Californian clients.
The decision, subject to approval from the bankruptcy court, comes from BlockFi’s actions following the collapse and insolvency of its main financial backer, FTX, in November 2022.
After revealing exposure to the now-defunct crypto exchange, BlockFi paused all activities on its platform, including crypto deposits and withdrawals, effectively locking up customer funds. Two weeks later, the lender filed for Chapter 11 bankruptcy protection at the U.S. Bankruptcy Court for the Southern District of New Jersey on November 28, 2022.
California DFPI Orders BlockFi to Return Over $100,000 Paid in Loan Repayments back to Borrowers
After investigating the company, the DFPI found that BlockFi failed to notify customers that they could stop repaying their loans as the crypto lender had halted all operations. 111 Californian borrowers had remitted approximately $103,471 in loan repayments to BlockFi between November 11 and November 22. All the while, the customers were unable to withdraw their collateral assets from the platform.
On November 11, the day after BlockFi announced it had paused all operations, the DFPI Commissioner suspended the New Jersey-based crypto firm’s lending license issued under the California Financing Law for thirty days. The agency then moved to revoke the license on December 15, 2022.
BlockFi has now agreed to an interim suspension of its lending license while bankruptcy and revocation processes are still pending. The company also admitted to its wrongdoing in not providing timely notification to borrowers to stop repaying their loans and agreed to a final order to discontinue operations and a desist and refrain order.
BlockFi’s Run-In With Regulators
The Californian DFPI, which considers cryptocurrencies as securities, began its investigation into the insolvent crypto lender in February 2022. By March, the agency found that BlockFi was offering and selling securities products in the state without a license.
The product in question was the company’s high-yield interest-earning accounts, which allowed customers to lend their crypto to borrowers and earn interest in return. BlockFi promoted the product as a means to earn passive income where customers could deposit crypto assets such as Bitcoin, Ethereum, and Litecoin into their interest accounts to get guaranteed returns.
The department claimed that the interest accounts BlockFi was promoting and selling to Californian residents involved the sale of unregistered securities. In July, the company was ordered to stop offering the product in the state. BlockFi initially pushed back against the ruling but later agreed to halt the service in California.
Around the same time, the crypto lender was fined by the U.S. Securities and Exchange Commission (SEC) for failing to register its crypto lending product as a securities offering. 32 other states, including California, had filed similar allegations against the company.
BlockFi was charged with violating federal securities laws and agreed to pay a hefty $100 million fine. The lender then negotiated a deal to pay $50 million to the SEC and the remaining funds to be distributed among states that sued the company.
The Crypto Lender’s Fall From Grace
Things started to unravel for the company during the crypto winter of 2022. Following the collapse of famed cryptocurrency projects Terra and Luna in May, many crypto lenders, including BlockFi’s arch-rivals Voyager Digital and Celsius Network, went bust.
The companies were heavily impacted by the subsequent collapse of the market, which saw Bitcoin fall to its lowest value in two years since reaching an all-time of $69,000 only a few months prior. The Terra/Luna collapse wiped out almost $500 billion from the crypto market, causing losses of over $40 billion to token holders.
Voyager Digital and Celsius suspended all activity and froze customer withdrawals after facing a liquidity crisis. Both companies later filed for Chapter 11 bankruptcy. BlockFi, which also faced significant liquidity issues, had to lay off 20% of its workforce to stay afloat during the events and was prepared to declare insolvency, only to be “saved” by someone that caused the company’s demise.
BlockFi was bailed out by none other than Sam Bankman-Fried, the disgraced former billionaire and founder of FTX. Bankman-Fried provided BlockFi with a $400 million loan through his proxy holding company Emergent Fidelity Technologies. The former CEO of FTX also agreed on an option to purchase the company for $240 million in 2023.
The exposure to FTX is what ultimately led to BlockFi’s insolvency. In its bankruptcy filing, the company revealed that it owes over $1 billion in liabilities to 100,000 creditors, which included $275 million to FTX and $30 million in fines to the SEC. BlockFi also filed a lawsuit against Bankman-Fried, alleging that the conman had promised $600 million worth of his holding company’s shares in brokerage firm Robinhood as collateral in the event something went wrong.
In light of the DFPI’s allegations, BlockFi has filed a motion in the New Jersey bankruptcy court requesting permission to direct its servicer to return loan repayments to customers. A hearing concerning the request is set to take place on April 19, 2023, according to the DFPI announcement.