BlockFi Sets New Standard for Crypto Bankruptcies

BlockFi and FTX Near End of Bankruptcy Process

Several major crypto bankruptcies, including BlockFi and FTX, are approaching their final stages. FTX has a key hearing next month that may see its reorganization plan approved by the court. Earlier this year, creditors gave their support to the plan, though it remains somewhat controversial. Depending on the outcome of the hearing, FTX’s bankruptcy could conclude by the end of this year.

BlockFi is also nearing the end of its bankruptcy proceedings. According to Richard Kanowitz and Alexander Grishman, attorneys from Haynes and Boone, BlockFi has already had its plan confirmed and is now in the “final stages” of the process.

Disputes Over Crypto vs. Cash Distributions

One significant point of contention in both FTX and BlockFi’s bankruptcy cases involves whether creditors will be paid in cash or in-kind (returning cryptocurrency). In FTX's case, the court ruled that distributions would be made in cash, which frustrated some creditors. Similarly, BlockFi’s creditors pushed for in-kind distributions but faced challenges because there wasn’t enough cryptocurrency available to repay them fully.

Kanowitz explained that if BlockFi had sufficient crypto to distribute, it would not have needed to declare bankruptcy in the first place. BlockFi’s downfall was linked to Alameda Research, which owed over $600 million in crypto to BlockFi Lending and BlockFi International but failed to repay.

BlockFi Sets the "Golden Standard" for Crypto Bankruptcies

Unlike FTX, BlockFi’s bankruptcy team was able to provide accurate reports detailing the firm’s holdings. This level of transparency helped streamline the process. Kanowitz referred to BlockFi’s bankruptcy proceedings as the “golden standard” due to the organization and cooperation of the team.

Grishman, who worked with BlockFi before the bankruptcy and later assisted with the bankruptcy process, was credited for some of this success. He believes that BlockFi’s organized approach made a significant difference in the speed and efficiency of the case compared to other crypto firms.

Is the Current Bankruptcy Code Enough for Crypto?

The question remains whether the current bankruptcy laws are well-suited to handle cryptocurrency bankruptcies. Kanowitz argued that, despite the unique nature of crypto, there was nothing in the BlockFi case that the bankruptcy code couldn’t manage. Grishman agreed, stating that the underlying asset, in this case cryptocurrency, is novel, but the bankruptcy courts were fully equipped to handle it.

However, Bill Hughes, senior counsel at Consensys, expressed a different viewpoint. He emphasized the need for new regulations tailored specifically to crypto. Hughes pointed out that applying traditional financial rules to crypto doesn’t always work due to the peer-to-peer nature of blockchain technology. He suggested changes in accounting rules, bankruptcy code, and even the tax code to better align with how crypto operates.

A Silver Lining for the Future of Crypto Bankruptcies

Despite the challenges, Grishman believes these cases are beneficial in the long run. They are helping the industry understand how to better structure crypto products and safeguard customer assets. He suggests that future practices may include holding assets off-balance sheet, ensuring they are not part of a company’s bankruptcy estate if another financial crisis occurs.

In summary, BlockFi’s bankruptcy process has been smoother and more transparent than FTX’s, setting a benchmark for future crypto bankruptcies. As the industry evolves, there is a growing call for tailored regulations that can handle the unique aspects of crypto while ensuring customer protection and market stability.