Lifeline FTX proves toxic

BlockFi, the cryptocurrency lending and financial services platform that grew 25,000 percent in 2021 and topped Inc.’s 2022 list of fastest-growing companies in America, filed for Chapter 11 bankruptcy protection Nov. 28.

Although the company listed between $1 billion and $10 billion in liabilities in its Chapter 11 bankruptcy filing, BlockFi’s biggest liability is its association with FTX and Alameda Research, two organizations founded by Sam BankmanBurned in a cloud of scandals and missing funds in early November.

Over the summer, FTX, in its role as Bankman-Fried’s latest industry lender, gave BlockFi a $400 million line of credit in exchange for the option to buy the company for $240 million. The idea was to stabilize the company and the industry after the collapse of Voyager and Three Arrows Capital.
The white knight’s shiny armor turned out to be tarnished. FTX, Alameda and other SBF-related companies filed for bankruptcy in early November. Bankman-Fried, a.k.a. SBF, has been implicated in an $8 billion to $10 billion loss in client and client funds.

BlockFi, as one of those clients, had “significant exposure” to FTX, largely through its holdings of a crypto token that FTX issued called FTT, which BlockFi held as collateral. FTT’s price dropped about 90 percent when FTX’s problems came to light.

BlockFi said it had about $257 million in cash, “which is expected to provide enough liquidity to support some operations during the restructuring period.” The company went to bankruptcy court in New Jersey for permission to continue operations, which was expected.

FTX, on the other hand, was proven to have been a fraudulent operation, conducted at a luxury complex on an island in the Bahamas, where its top executives allegedly lived in a polyamorous commune, free from oversight, basic accounting and standard management. FTX’s court-appointed CEO, John J. Ray III, who oversaw Enron’s bankruptcy, said of the company, “Never in my career have I seen such a complete failure of corporate control and such a complete lack of credible financial information as happened here.”

Although he stated otherwise, SBF “borrowed” customer funds from FTX to trade in its separate affiliate, Alameda Research. The trades that blew up. It wasn’t until CoinDesk discovered that Alameda’s balance sheet had also been filled by FT that the extent of SBF’s alleged shenanigans became known. The bankruptcy filing was a rude shock to the named venture capitalists and celebrities on the FTX top table. These include investment firms like Sequoia Capital and SoftBank, as well as athletes like Tom Brady and Steph Curry.
Supposedly they have all done the FTX vetting. They all screwed up. In Inc.’s story about BlockFi’s struggles, BlockFi CEO and co-founder Zach Prince foresaw the possibility of buying out the FTX option to acquire BlockFi-one, which almost certainly won’t be used now, and “keep going as an independent company and be publicly traded.”

It was based, of course, on the prospect that crypto would continue on its path to normalization despite another crypto winter. “They probably have about a year to make their case,” Inc. Thanks to FTX and Bankman-Fried, which turned out to be only a couple of months. They didn’t know it at the time, but they didn’t even have a chance of winning.