Transfers were halted by BlockFi in early November of last year. On November 28, it formally declared bankruptcy. Nexo, a competitive crypto lender, proposed to buy BlockFi for an estimated $850 million in July of last year. However, the business rejected that offer in favour of a $400 million revolving loan offer from FTX US. When FTX began to plummet, the crypto lender began to struggle once more. It eventually declared bankruptcy under Chapter 11 protection.
A judge determined that BlockFi customers who kept cryptocurrency in interest-bearing accounts do not have a claim to the funds. The amount of these funds is approximately $375 million in cryptocurrency after the insolvent lender froze assets last year. Customers who owned custodial wallets, on the other hand, did not give up the same ownership rights. Customers who stored cryptocurrency in custodial accounts (non-interest-bearing accounts) can expect to receive around $297 million.
Wallet transfers from interest-bearing accounts to custodial wallets did not occur after 8:15 p.m. ET on Nov. 10, according to U.S. Bankruptcy Judge Michael Kaplan in Trenton. Customers who still had digital currencies in interest-bearing accounts no longer had access to those assets. These assets added up to roughly $375 million in total. This is despite getting email and in-app confirmation from BlockFi.
BlockFi was one of many crypto lenders to go bankrupt in 2022. The bankruptcies of Celsius Network and Voyager Digital raised issues about the ownership of consumer cash. In such cases, judges ruled that the money in interest-bearing accounts is the property of a bankrupt corporation. This indicates that it must be pooled with other assets and utilised to repay all creditors at a later date.
When BlockFi blocked accounts on November 10, 2022, the distinction between the two account kinds became blurred. However, BlockFi never completed the back-end work necessary to conduct transfers between the two account types. As a result, its terms of service permitted it to block transfer requests as part of its overall closure.
In an earlier court hearing, BlockFi attorney Michael Slade claimed that permitting the $375 million in transfers would drastically diminish the recovery for Wallet consumers. Due to the practical challenge of determining how to pay the extra Wallet claims from a fixed pool of assets, BlockFi may be unable to restore any client payments.
