The Fitch Ratings senior director said that BlockFi’s bankruptcy further underscores the asset contagion risks associated with the crypto ecosystem.
The Fitch Ratings senior director said that BlockFi’s bankruptcy further underscores the asset contagion risks associated with the crypto ecosystem.

Recently, crypto lender BlockFi filed for Chapter 11 bankruptcy of the US Bankruptcy Law. This is seen as the latest damage in the industry, after the company admitted to suffering massive damage from overexposure to crypto exchange FTX that collapsed earlier this month.

The New Jersey court filing comes as cryptocurrency prices plummet. In particular, the price of Bitcoin (BTC) – the largest digital token has dropped more than 70% from its peak in November 2021.

“BlockFi’s bankruptcy further underscores the asset contagion risks associated with the crypto ecosystem,” said Monsur Hussain, Senior Director of Fitch Ratings.

New Jersey-based BlockFi was founded by Zac Prince, an entrepreneur who ran in the Fintech sector then turned to crypto. BlockFi explained, the liquidity crisis was due to their exposure to FTX through loans to Alameda, a crypto exchange company affiliated with FTX, as well as cryptos held on FTX's platform. stuck there. The exchange also lists its assets and liabilities as between $1 and $10 billion.

Previously, FTX filed for bankruptcy in the US after traders withdrew US$6 billion from the platform in just 3 days and rival exchange Binance abandoned its rescue agreement. Previously, BlockFi also sued a joint stock company of Bankman-Fried – CEO of FTX exchange seeking to recover shares of Robinhood Markets Inc that were used as collateral before BlockFi and FTX filed for bankruptcy.

Mark Renzi, CEO of Berkeley Research Group commented, “Although the exposure of debtors to FTX is a major cause of bankruptcy filings, debtors do not face the multitude of problems that they face. FTX is facing.

In fact, BlockFi sold part of its crypto assets in early November to fund the bankruptcy. Those sales hit $238.6 million in cash, and BlockFi now has $256.5 million in cash on hand.

BlockFi's bankruptcy filing also comes after two of its biggest competitors, Celsius Network and Voyager Digital, filed for bankruptcy in July, citing extreme market conditions that resulted in losses in both markets. two companies.

As can be seen, crypto lenders, the real banks of the crypto world have exploded during the COVID-19 pandemic, attracting retail customers with double-digit interest rates in exchange for deposits. their cryptocurrency. Cryptocurrency lenders are not required to hold capital or a liquidity buffer like traditional lenders, and some find themselves impacted when a lack of collateral forces them and their customers to suffer. big losses.

BlockFi also lists the United States Securities and Exchange Commission (SEC) as one of its largest creditors, with a claim of $30 million. In February, a BlockFi subsidiary agreed to pay $100 million to the SEC and 32 states to settle fees related to a retail crypto lending product the company provided to nearly 600,000 people. Investors. In its bankruptcy filing, BlockFi said it hired Kirkland & Ellis and Haynes & Boone as bankruptcy advisors.

Lessons for investors:

The successive collapse of the “empire” in the cryptocurrency market is a reminder that there is no free lunch for those who want to make a quick buck in a relatively new and lacking market. Regulatory.

Financial expert Jon Ulin, CEO of Ulin & Co recommends: “You should only invest money that you are willing to lose, and calculation and skepticism are essential when evaluating assets, especially with financial products advertised by celebrities and social media influencers.”

From the above bankruptcies, it is suggested that it may be good for traditional financial companies to enter the cryptocurrency field, when they already have risk management apparatuses in place.

Particularly for virtual currency holders, they need to understand where virtual currency is kept and the risks that come with storing assets there. For example, a form of "cold storage" - that is, taking virtual currency offline, thereby reducing the risk of becoming a target of attacks. However, this approach reduces the liquidity of the asset and makes it difficult to trade quickly.

In June of this year, two US Senators Cynthia Lummis and Kirsten Gillibrand initiated a bill to create a legal structure for digital currency. The bill treats virtual currencies as a form of underlying commodity, similar to gold or crude oil, which are regulated by the Commodity Futures Trading Commission (CFTC).

Experts believe that the above collapse could accelerate these discussions and help move quickly towards the authorities to come up with specific regulations to regulate the cryptocurrency market.
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