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Crypto lender BlockFi files for Chapter 11

[November 29, 2022] (Reuters) - U.S. cryptocurrency lender BlockFi said on Monday it had filed for Chapter 11 bankruptcy protection along with eight affiliates in a New Jersey court, the latest casualty since FTX's collapse earlier this month triggered instability in the crypto market.

In a court filing, New Jersey-based BlockFi said it owes money to more than 100,000 creditors. It listed crypto exchange FTX as its second-largest creditor, with $275 million owed on a loan extended earlier this year.

COMMENTS:

FRANCESCO MELPIGNANO, CEO, KADENO ECO, ITALY

"The amazing thing through all of this is that DeFi protocols have been protected through all this. Despite the setback to the industry, the case for the underlying technology is only getting stronger."

"One thing that would be interesting would be to put a cap on the leverage or the right sort of circuit breakers in the system, similar to what you have in traditional finance, to see that if one company has bad debt, it doesn't spread higher up the chain."

BRADLEY DUKE, FOUNDER AND CO-CHIEF EXECUTIVE OFFICER, ETC GROUP, LONDON

"It is unfortunate for BlockFi that the white knight that had offered them a lifeline back in June, hasn't managed to stay solvent themselves, in part because of the massive losses accumulated at Alameda Research stemming from the same event - the collapse of Terra Luna and Three Arrows Capital."

"If FTX had been run by a responsible and experienced management team with the requisite transparency, capital adequacy, asset segregation and operational controls in place, it would probably still be in business."

"At ETC Group, we believe in crypto, but we also believe in applying best practice and the regulatory rigour of traditional finance to our product offering because we know that the rules of good business do not change simply because new disruptive technology has arrived."

MARTHA REYES-HULME, HEAD OF RESEARCH, BEQUANT, LONDON

"The BlockFi bankruptcy is a sad chapter in the short history of our industry that has forced participants to be more mindful of risk management, counterparty risk, and governance. Our clients have always used diversification to minimize exchange risk but now we are seeing many pull back in the short term and seek better solutions, especially around custody, to protect their assets. We are working closely with them. Ultimately it will be better for everyone. We are still seeing interest to onboard, even in these difficult times, which is reassuring as well as interest from mainstream institutions that attended our conference last week."

MONSUR HUSSAIN, SENIOR DIRECTOR, FITCH RATINGS, LONDON

“BlockFi’s Chapter 11 restructuring underscores significant asset contagion risks associated with the crypto ecosystem, and, potentially, deficient risk management processes. Restructuring processes can be notoriously lengthy – Mt Gox’s creditors are only getting closer to being paid eight years after the operation failed.”

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BlockFi logo is seen in this illustration, November 28, 2022. REUTERS/Dado Ruvic/Illustration

MARK CONNORS, 3iQ DIGITAL ASSET MANAGEMENT, TORONTO

“During a period of unwinding and consolidation, which is where we are, leveraged strategies are more at risk. We’re trying to separate the wheat from the chaff here, and I don’t think many people were surprised by the BlockFi filing... BlockFi received a $250mm loan in Q2, from FTX – likely in self interest to help keep overleveraged Alameda afloat. So, today’s action was not unexpected.”

“Institutional investment is stalled right now in the wake of this. The first assessment will be, what failed? We believe it’s the unregulated centralized entities. So institutions are going to go back and say, did we invest in the wrong people in the VC stage? I think that's going to be a big yes. Does this mean that bitcoin and Ethereum, the two main protocols that account for 60-odd percent of the digital asset space are flawed? There’s no institutional investor who can say those protocols failed, or do not hold the same promise they did before the FTX failure. So there are institutions that remain interested, but regulators need to define the state of play for institutions to follow.”

“There are (crypto) lending models that make sense. The decentralized finance models used proper collateralization and they're intact. Some centralized models did not. I think you're seeing the models with the weak lungs fail first. If a company gives you 18% yield, you better know really well where that yield is coming from.”

“FTX US, is I think the second largest creditor in BlockFi. But the question is, was that denominated in the FTT token or was it cash? In other bankruptcies, you’d have hard assets or U.S. dollars … we don’t know if they loaned (FTT) to BlockFi but we’re asking that questions for good reason.”

CONOR RYDER, RESEARCH ANALYST, KAIKO, DUBLIN

"The BlockFi filing is the latest in a string of contagion events after FTX, and arguably continued fallout from Celsius/Three Arrows Capital last summer. It was yet another example of neglected risk management when prices were going up, as crypto winter hit those that took on the most counterparty risk are getting exposed."

"From a customer standpoint it serves as another reminder to be skeptical of any crypto yield products on offer, particularly those that sound too good to be true. That should be the biggest red flag now that a company is taking on added risk with your assets."

(Compiled by the Global Finance & Markets Breaking News team)

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