The story of BlockFi’s bankruptcy, starring FTX

Crypto lender BlockFi and eight of its affiliates, last valued at $4.5 billion, filed for bankruptcy yesterday, becoming the latest domino to fall in the industry this year.

🤿🪙 A deeper dive… Unlike Free Willy’s leap to escape captivity, this move didn’t exactly come out of the blue. BlockFi’s bankruptcy filing has been anticipated for quite some time. And according to the filing itself, written by Mark Renzi of Berkeley Research Group, BlockFi’s proposed financial adviser in the case, there are two acts to this movie:

1. The collapse of Luna and TerraUSD stablecoin, which caused Three Arrows Capital (3AC) to crash
2. The epic-and-much-discussed collapse of FTX

Act #1 led to BlockFi taking losses of $80 million, since 3AC was one of its largest borrower clients. This caused liquidity issues for BlockFi, who then turned to FTX for a bailout. FTX ultimately extended a $400 million line of credit to BlockFi… and then, well. We all know what happened next to FTX. 

BlockFi halted customer withdrawals on November 10, the same day FTX filed for bankruptcy.

Interestingly enough, FTX not following through on actually providing the full $400 million line of credit wasn’t what caused BlockFi to ultimately file for bankruptcy – though the Sam Bankman-FraudFried-led exchange was tangentially involved. Alameda Research, the now-collapsed crypto exchange’s sister trading firm, defaulted on $680 million in collateralized loans from BlockFi, court filings show.

+Dive deeper: Into the phenomenon of financial contagion, when the failure of one institution ultimately leads to a cascade of similar failures elsewhere. The US banking crisis of 1930-31 is a great example (s/o It’s a Wonderful Life).