If 2022 saw significant crypto bankruptcies, 2023 has seen intricate and occasionally contentious disagreements over the optimal way to reimburse creditors.
Yet at least one insolvent crypto firm, BlockFi, is steaming ahead with its bankruptcy plan, which a New Jersey court approved in September, and which became effective on October 24.
In a recent blog post, BlockFi celebrated the conclusion of its bankruptcy proceedings and the start of a new chapter in which the firm will begin repaying its creditors.
“BlockFi’s management, advisors, and other stakeholders worked diligently over the past 11 months to reach this critical milestone. We are proud to say that BlockFi reached its Effective Date more quickly and efficiently than many other retail crypto companies,” the firm stated.
According to the plan, the first distributions to out-of-pocket BlockFi customers who have yet to recover their assets from the platform will begin in early 2024.
From the outset, BlockFi’s administrators have prioritized repaying its debts as quickly as possible.
After filing for Chapter 11 bankruptcy in November 2022, when it became evident the impossibility of rescuing the business, BlockFi suggested liquidating its assets to refund customers’ funds.
The company wrote a letter to creditors outlining a plan that it argued was “the fastest way to return the funds currently held in Wallet Accounts back to customers, in kind, as quickly as possible.”
To speed things along, the firm also opted to waive all preference claims, which allow bankrupt businesses to claw back debt repayments deemed to have prioritized certain creditors over others.
“BlockFi will not waste time, effort, or money attempting to hold back assets held in Wallet, and will not initiate lawsuits to claw back any assets that were moved off of the BlockFi platform over the last several months that are currently in the possession of our clients,” the firm stated.
It added that it “does not see these options as the best way to maximize clients’ recovery.”
For BlockFi Wallet users, the platform has moved to unfreeze digital assets that have been locked up during its bankruptcy proceedings.
In an email to customers in August, the firm said that “it is our belief that clients unambiguously own the digital assets in their BlockFi Wallet accounts.”
With its repayment plan now approved, BlockFi Wallet users are eligible to claim compensation in the form of crypto assets such as bitcoin and Ether that they held on the platform.
Meanwhile, Wallet will convert certain ‘Trade-Only Assets’ to USDC or another stablecoin before making them available for withdrawal.
Any digital assets in BlockFi Wallet accounts unclaimed within the 60-day withdrawal period, will become cash for future repayments.
In contrast with FTX, BlockFi appears to have successfully compartmentalized its different operational units.
As a result, the company’s bankruptcy plan successfully argued that BlockFi Wallet users owned their own digital assets. As such, creditors that lent the company money have no legal claim to assets held by accounts that simply used the platform as a cryptocurrency wallet.
However, in addition to basic custody services, BlockFi also offered interest-bearing accounts. With BlockFi Interest Accounts (BIA), users essentially earned a return on their deposits, generated by interest BlockFi charged on its crypto loans.
Because BIA funds were integral to its lending operations, they now belong to BlockFi’s bankruptcy estate and will be subject to a different repayment scheme, with distribution scheduled to begin in early 2024.
Importantly, the bankruptcy plan invalidates transfers from BlockFi Interest Accounts to regular custody wallets that users hadn’t completed before the platform’s pause on November 11, 2022.