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Cryptocurrency exchange BlockFi filed for Chapter 11 bankruptcy on November 28, the latest victim of the contagion caused by the FTX crash earlier this month.
The New Jersey-based exchange's troubles began in June with a liquidity crisis when crypto hedge fund Three Arrows Capital collapsed.
Former FTX CEO Sam Bankman-Fred offered to bail out BlockFi during the June crisis, but the bailout quickly collapsed as the FTX empire collapsed.
BlockFi said in its bankruptcy filing that it had significant exposure to FTX and Alameda Research.
"Following the collapse of FTX, BlockFi's management team and board acted immediately to protect customers and the business," said Berkeley Research Group's Mark Renzi, the company's financial advisor, in a Nov. 28 press release.
The troubled crypto company has suspended withdrawals of customer deposits and said "customer complaints will be handled through the Chapter 11 process."
BlockFi is beyond salvation
The collapse of FTX, once one of the largest cryptocurrency exchanges in the world, has accelerated the spread of infection in the cryptocurrency industry.
The Bahamas-based exchange declared bankruptcy on November 15 with an $8 trillion hole in its balance sheet. In addition to FTX, 130 affiliates have filed for bankruptcy.
FTX owes an estimated $3.1 billion to its 50 largest creditors, according to bankruptcy court filings, including BlockFi.
Earlier this year, BlockFi accepted a $400 million loan from FTX. The package came in rescue mode to help the ailing crypto exchange deal with a liquidity crunch affected by the TerraUSD crash.
Terra's collapse wiped out nearly half a trillion dollars in market capitalization from the broader crypto markets.
The "White Knight" FTX deal gave it the right to acquire BlockFi within a year and weakened the company's liquidity.
BlockFi counsel Mark Renzi said in court documents that Three Arrows Capital is "one of BlockFi's largest donors." A Singaporean hedge fund is investing heavily in TerraUSD, exposing the tangled web of the crypto world.
This first wave of contamination forced cryptocurrency issuers like Celsius and Voyager Digital to file for bankruptcy protection. Celsius, which allegedly owed its customers $4.7 billion, went under. Meanwhile, Voyager's bill was $1.3 billion.
In the end, while FTX's credit facility didn't sink BlockFi over the summer, the company didn't escape the growing prevalence of the cryptocurrency crash.
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BlockFi's failure spells more trouble for cryptocurrencies
While all the details have yet to be released, BlockFi's bankruptcy filing reveals that the company has more than 100,000 creditors. The filing also shows that the largest customer disclosed has a balance of $28 million.
While these numbers are scary, they pale in comparison to FTX. But they also highlight how FTX has been central to the entire cryptocurrency ecosystem since its affiliates went bankrupt.
Fear has spread throughout the cryptocurrency industry and cryptocurrency exchanges are looking to Proof Reserves to assure customers that their assets are completely safe.
Changpeng Zhao, CEO of crypto exchange Binance, reveals Binance's remarks and calls for the industry to be more transparent.
However, critics argue that showing reserves means nothing unless liabilities are also included. In addition, cryptographic evidence is required to enter each account into the account of assets and liabilities and signatures proving that the custodians have control over the portfolios.
The biggest fallout from the cryptocurrency taint could be tougher regulation, as lawmakers will no doubt scrutinize the industry after the latest scandal to hit the space this year.
Cryptocurrency has no investor protection
With all these failures, what happens to users now?
Investor protection in cryptocurrencies is not the same as in traditional finance. Unlike the collapse of banks around the world during the Great Recession, there will be no government bailouts.
Customers of traditional banks, brokerage houses and 401(k)s benefit from a government-backed insurance cushion. But the FDIC. (FDIC) and the Securities Investor Protection Corporation. (SIPC) does not apply to crypto-assets.
The lack of investor support prompted Bankman-Fried and FTX to step in as lenders of last resort earlier this year.
Much of the uncertainty comes from the fact that regulations in this area are still evolving. Ever since Satoshi Nakamoto introduced Bitcoin (BTC) in 2009, digital assets have been in a legal gray area.
Although cryptocurrency platforms suffer from what Bankman-Fried calls "banking," they are not banks.
It's also unclear among regulators whether crypto-assets are securities or not, as lawmakers and federal agencies are still figuring out how to regulate them.
The lack of clarity in the industry and the precarious position that many customers have been put in due to the failure of all the businesses that have failed, is why many are calling for regulators to speed up their work to cover the industry.
What's next for BlockFi customers?
BlockFi's bankruptcy filing was highly anticipated following the demise of FTX. The ailing platform suspended payments following the collapse of FTX earlier this month.
The halt in withdrawals was a similar step taken by other lenders, including Celsius and Voyager Digital, before they filed for bankruptcy.
Now, like the customers of these platforms, the fate of BlockFi's customers is very much out of control, and court cases are likely to drag on for years.
No one will do that, but BlockFi advised its customers not to leave any more money.
In a statement to customers, BlockFi said: "We advise customers to maintain their BlockFi app and account for the time being. At this time, BlockFi withdrawals are pending. We continue to ask customers not to deposit into BlockFi wallets or interest accounts. "
BlockFi says it has $256.9 million in cash, enough to fund the costs of bankruptcy proceedings, allowing the company to avoid debtor-in-possession financing.
However, the most important factor for most customers is that withdrawals are pending. Unfortunately, this won't change anytime soon.