BlockFi Plan Administrator Shares Legal Hurdles to Secure Full Customer Recovery as Claims Sale Proceeds

Key Takeaways

• BlockFi’s sale of claims against bankrupt FTX paves the way for full repayment of approved customer and creditor claims.
• A previous agreement with FTX secured over $874 million in claims for BlockFi.
• Strategic legal maneuvering was crucial in maximizing BlockFi creditor recoveries.
• Efficient claim management and sales were essential for creditor payouts.
• The BlockFi case sets a precedent for innovative bankruptcy strategies in the crypto space.

BlockFi is nearing an “in principle” agreement with the bankrupt estates of FTX and Alameda Research. 

The crypto lending firm’s bankruptcy was largely triggered by its entanglements with FTX’s hedge fund in November 2022. Now, years after announcing its wind-down to focus on returning crypto assets to their rightful owners, claimants could soon see the light at the end of the tunnel.

BlockFi’s plan administrator disclosed the sale of its claims against FTX, setting the stage for a complete payout to all approved customer and creditor claims soon.

In a statement shared with CCN, BlockFi’s plan administrator, Mohsin Y. Meghji, suggested that the transaction involving all claims against FTX  signifies the concluding phase of the company’s wind-down process.

Meghi stated:

“This transaction marks a final chapter in the wind-down and is the best possible outcome for customers of BlockFi. These recoveries on customer claims, and the timeline those recoveries will be distributed on, were unimaginable when these cases were filed in November 2022. These results, achieved through tireless efforts by various parties, are remarkable. We intend to commence the Final Customer Distribution as quickly as reasonably practicable.” 

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Leveraging March FTX Deal to Secure Customer Funds Through Claims Sale

The announcement follows a March 2024 agreement with FTX, which allocated over $874 million in claims against FTX and its affiliate, Alameda Research, to BlockFi. Following this, the plan administrator approved selling these claims to a third party.

In March, BlockFi provided a detailed breakdown of this settlement, including $185.2 million attributed to the value of BlockFi’s assets held on the FTX exchange and $689.3 million related to loans BlockFi extended to Alameda.

Under the agreement, $250 million of the total claim would be treated as a secured claim, granting BlockFi priority in payments once creditors approve FTX’s bankruptcy exit plan.

This arrangement enabled BlockFi to move forward with a second interim distribution to its creditors. Additionally, the agreement included a provision where FTX would withdraw its claim against BlockFi.

BlockFi to Sell FTX Claims, Customers to See Significant Recovery

Brown Rudnick, the law firm representing the plan administrator, informed CCN that in June 2024, the plan administrator decided that selling the claims would optimize customer returns and significantly recover funds for subordinate creditors while reducing timing and execution risks associated with BlockFi’s FTX claims. 

Consequently, a sales process was initiated on June 24, 2024, and concluded on July 10, 2024, with the highest and best offer significantly exceeding the claims’ face value.

Since BlockFi’s platform has ceased operations, any in-kind distributions will be managed exclusively through the plan administrator’s partnership with Coinbase. Notably, distributions to BlockFi’s international creditors will require further identity verification and KYC checks to adhere to global standards.

However, clients outside the US will continue to face delays in receiving funds due to regulatory restrictions, and no clear timeline has been provided for these payments.

Why Creditors Sell Debts from Bankrupt Companies: Immediate Benefits and Reduced Risks?

One of the primary causes of BlockFi’s bankruptcy in November 2022  was its financial exposure through loans to FTX’s hedge fund, Alameda Research. Despite these difficulties, BlockFi permitted its Wallet customers to withdraw their funds in October 2023.

Creditors often opt to sell their debts against bankrupt or insolvent companies for several compelling reasons:

• Immediate Payment: Selling debt allows creditors to quickly receive cash for an asset that might otherwise be considered a loss.
• Simplified Process: This method eliminates the complexities and ongoing obligations associated with remaining a creditor.
• Risk and Cost Avoidance: Creditors can bypass the uncertainties and expenses tied to the bankruptcy proceedings.
• Reduced Accounting Burden: Selling the debt removes the need for continuous accounting for the claim.
• Avoidance of Documentation Loss: Over time, crucial documents validating the debt can be lost or destroyed; selling the debt early on helps secure its current value and mitigate such risks.

Selling debts early in the bankruptcy process can thus secure immediate value and substantially decrease risks for creditors.

About the Author

Teuta Franjkovic

Teuta is a seasoned writer and editor with more than 15 years of experience. She has expertise in covering macroeconomics and technology as well as the cryptocurrency and blockchain industries. She has worked for several publications as a journalist and editor, including Forbes, Bloomberg, CoinTelegraph, Coin Rivet, CoinSpeaker, VRWorld and Arcane Bear. Teuta began her professional career in 2005, working as a lifestyle writer at Cosmopolitan in Croatia. From there, she branched out to several other publications, covering mainly business and the economy. She then turned her attention to the world of cryptocurrency and blockchain, believing that crypto is among the most important inventions in the history of humanity. Her involvement in fintech began in 2014 and she has since lent her expertise in writing, editing and gathering information about the world of crypto, blockchain, NFTs and Web3. An all-round news hound, mentor, editor, and writer, Teuta enjoys teamwork and good communication. She holds a WSET2 diploma and has a thing for chablis, punkrock music and shoes. She also holds a double MA in Political science and Entrepreneurship.

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