The bankruptcy of digital asset lending/custodial platform BlockFi is the latest casualty of the FTX exchange’s collapse, while FTX’s founder continues his carefree existence in his alternative reality.
On Monday, the New Jersey-based BlockFi formally filed for Chapter 11 bankruptcy protection, citing $1.3 billion owed to over 100,000 creditors. BlockFi said it has nearly $257 million in cash on hand, which it hopes will “provide sufficient liquidity to support certain operations during the restructuring process.”
The filing, which was made in the U.S. Bankruptcy Court for the District of New Jersey, says BlockFi had “initiated an internal plan to considerably reduce expenses, including labor costs.” BlockFi simultaneously filed papers in Bermuda asking local courts to appoint joint provisional liquidators for its local subsidiary BlockFi International Ltd.
BlockFi halted withdrawals earlier this month following the Chapter 11 filing of FTX and roughly 130 FTX-affiliated entities, including the U.S.-licensed FTX US exchange and FTX’s market-maker Alameda Research.
BlockFi’s woes became acute following this spring’s implosion of the Three Arrows Capital (3AC) ‘crypto’ hedge fund, which was in turn sparked by the collapse of Terraform Labs’ Luna/UST tokens. This summer, FTX provided BlockFi a financial cushion to help break its fall but, as we now know, this was beyond FTX’s actual capabilities at the time.
BlockFi’s largest creditors include $729 million owed to Ankura Trust Company, the trustee responsible for running BlockFi’s interest-bearing accounts. BlockFi also owes FTX US around $275 million, thanks to the aforementioned line of credit FTX provided this summer. Another $49 million is owed to a single BlockFi client whose identity was redacted on the bankruptcy filing.
BlockFi also owes $30 million to the U.S. Securities and Exchange Commission (SEC), which, in combination with 32 U.S. states, reached a $100 million settlement with BlockFi in February. The settlement stemmed from BlockFi’s offering of unregistered lending products and misleading customers as to the risks involved in the use of said products.
However, a Tuesday bankruptcy court hearing revealed that FTX/Alameda owe BlockFi over $1 billion, including $671 million in loans on which Alameda defaulted and $355 million in digital assets currently locked up on the shuttered FTX exchange. The revelation pokes further holes in FTX’s much-ballyhooed ‘bailouts’ of troubled crypto firms, which are now understood more as ways for FTX to access badly needed capital and to mask its own debt obligations as the walls of its financial house caved in.
Share the Robinhood wealth
BlockFi appears to want to go down swinging, as its bankruptcy filing was accompanied the same day by a civil complaint against Emergent Fidelity Technologies (EFT) and ED&F Man Capital Markets Inc (EDFM). EFT is the investment arm of FTX founder Sam Bankman-Fried (SBF), while EDFM is EFT’s broker.
BlockFi claims that on November 9—mere days before FTX et al filed for bankruptcy protection—it had entered into a ‘pledge agreement’ with EFT in which BlockFi “agreed to forbear from exercising certain rights and remedies then available to them under various loan documents as a result of multiple events of default.”
As part of this agreement, EFT agreed to provide BlockFi with collateral in the form of “certain shares of common stock,” an apparent reference to the 7.6% stake in financial services firm Robinhood Markets that SBF acquired earlier this year through Alameda.
BlockFi’s complaint accuses EFT of failing “to satisfy its payment obligations and to promptly deliver” said Robinhood shares to BlockFi. BlockFi says EDFM, who under the pledge agreement was tasked with holding the Robinhood shares, refused to cough them up following EFT’s default on the agreement.
The Financial Times reported that, immediately prior to FTX’s bankruptcy filing, SBF was frantically trying to sell his Robinhood stake on the sly to raise cash in the vain hope of avoiding Chapter 11. But SBF found no takers for the troubled stock, which has shed half its value in the first eight months of this year as Robinhood grappled with the end of the meme stock craze, revenue declines, massive layoffs and a $30 million fine for violating New York State’s anti-money laundering regulations.
There’s been plenty of evidence this year of assets being endlessly ‘rehypothecated’ to compensate for the fact that the inflow of public money into the ‘crypto’ market had long ago slowed to a trickle. Each new bankruptcy exposes situations in which there are multiple claimants for every remaining asset, with retail investors ignominiously relegated to the back of the creditor bus.
The U.S. House of Representatives’ Financial Services Committee has called on SBF to testify at a hearing in Washington on December 13. Meanwhile, the Texas State Securities Board (TSSB) is seeking his participation in a hearing scheduled for February 2, 2023. The TSSB opened a probe into FTX last month after learning that the exchange was pitching Texans on investing in yield-bearing products that the TSSB believes are unregistered securities.
SBF remains ensconced in the Bahamas, and while every day makes extradition to the U.S. appear more likely (and more overdue), the TSSB is reportedly open to allowing SBF to participate in next February’s hearing via Zoom.
SBF talks (mostly out his ass)
Meanwhile, despite the fervent wishes of his attorneys, SBF simply cannot shut his pie hole. On Tuesday, ‘crypto content creator’ Tiffany Fong posted a lengthy phone interview she conducted with SBF on November 16 in which the bizarrely-not-yet-in-handcuffs poster boy for crypto criminality willingly expounds on a wide variety of subjects.
Having been shitcanned by his high-priced legal team after refusing to stop tweeting post-bankruptcy, SBF told Fong that he initially responded to his lawyers’ pleas to stop telling the world that he’d “fucked up” by telling his lawyers to “go fuck themselves.” (Reminiscent of SBF’s recent chat with a Vox reporter in which he stated “Fuck regulators.”) Betraying his utter unawareness of his current predicament and the fact that law enforcement is taking notes, SBF claimed that shutting up would not be “helping anything.”
Dude, do you even code?
In between his repeated hems and haws and the ambient lapping of Bahamian waves, SBF denied media reports that there was a ‘backdoor’ in the FTX platform’s software that allowed him to effectively move funds between FTX and Alameda without anyone being aware. SBF claimed that he couldn’t have built such a backdoor because “I don’t even know how to code.”
SBF said the “nearest neighbor” to this report was FTX’s original inability to obtain legit banking accounts, which forced him to rely on Alameda’s allegedly respectable ‘Research’ designation, so that customers could wire money to Alameda that would be credited to their FTX accounts. SBF claims it was this “fuckup” that led him to be off regarding the extent of Alameda’s leverage “by a fairly large number.”
F That Token
As for the use of FTX’s in-house token FTT to make Alameda’s balance sheet appear far more robust than it was, SBF insisted that the real problem was the “run on the bank” of FTX, which he says amounted to 30x the normal daily volume of customer withdrawals. SBF clearly never understood the legal duties of an exchange, which, because it’s not a bank, should have always had enough assets on hand to fulfill 100% of its customers’ withdrawal requests.
While FTX US was among the 130-odd companies included in the Chapter 11 protection, SBF claimed that FTX US was “so fucking solvent that even after losing $250 million in a hack [by parties unknown in the immediate wake of the bankruptcy filing] … it’s still solvent. About $500 million over.”
As for that hack, SBF says he’s narrowed down his list of likely suspects to “like, eight people.” It was “either an ex-employee or someone installed malware on an ex-employee’s computer.” (Whoever it was, they now appear to be moving their newly-laundered gains to exchanges.)
Withdrawals for everyone (who could possibly punch me in the face)
Immediately post-bankruptcy, FTX issued a statement that it was opening up withdrawals for Bahamian customers only “per Bahamian HQ’s regulation and regulators.” But the Securities Commission of the Bahamas quickly issued a statement saying it “has not directed, authorized or suggested” the prioritization of withdrawals for FTX’s Bahamian clients.
Securities Commission Addresses FTX Statement on Bahamian Withdrawals pic.twitter.com/OZKWwicSuN
— Securities Commission of The Bahamas (@SCBgov_bs) November 12, 2022
SBF told Fong that he’d given the Securities Commission “a one-day heads-up” of his intention to allow Bahamian withdrawals and “they didn’t say yes or no.” SBF added that he’d taken this step “because [the Bahamas is] where I am right now and you do not want to be in a country with a lot of angry people in it.” SBF denied this step was taken to facilitate insider withdrawals, merely to “create a regulatory pathway forward for the exchange.”
An equal opportunity grifter
Following FTX’s implosion, much has been made in U.S. right-wing political circles about SBF’s hefty campaign contributions to Democratic candidates. These comments routinely ignore that Ryan Salame, FTX’s former co-CEO, donated almost as much to Republican candidates during the same election cycle. But SBF told Fong that there was more to his own donation profile than meets the eye.
SBF said he’d “donated about the same amount to both parties.” The difference is that “all of” his GOP contributions were made “dark,” an entirely legal process (since 2010) that allows recipients to mask their donors. The reason for the subterfuge, according to SBF, is that “reporters freak the fuck out when you donate to Republicans” because reporters are too “liberal” and SBF “didn’t want to have that fight” with media outlets that were already swallowing his effective altruism schtick.
Then there’s the bizarre conspiracy theory that SBF funneled even more money to Democrats by laundering it through Ukraine. SBF denied he was smart enough to pull off something that outrageous but “wished I was part of an international conspiracy that interesting.” Clearly, he remains ignorant of the very real conspiracy he’s very much part of right now.
It’s only a Ponzi scheme if no new money comes in
SBF continues to insist that he’d been more or less railroaded into filing for Chapter 11 protection and that “eight fucking minutes after I filed for bankruptcy $4 billion more [in liquidity] came in.” SBF further claimed that if he hadn’t filed for Chapter 11 “all users would be whole” and withdrawals would be proceeding as usual, not just for FTX US customers but for the international dot-com site as well. Sadly, “the trustees of the estate would rather burn it all to the ground out of shame.”
SBF claimed that FTX International requires ‘only’ an additional $4 billion in net asset value and another $8 billion in liquidity to get back on its feet. “These are big numbers but they’re not insurmountable numbers.”
Left unsaid (and likely uncontemplated) in SBF’s calculations is that all these extra billions would simply mean FTX swapping one set of creditors for another. With Alameda’s success-challenged trading team now exposed as MIT not having sent their best or brightest, how would these new creditors ever be made whole? Simple! Find more new creditors! Like, duh…
With all the self-awareness of a fence post, SBF continues to paint himself as the bankruptcy John Connor, the ‘come with me if you want to live’ savior who just needs to be left alone so he can continue doing the Lord’s work. Without his magic touch, FTX US customers can expect to recoup only [what sounded like he said] “a penny on the dollar” while International customers stand to get “20-25¢ on the dollar.”
Here’s looking at you (behind bars), kid
The second part of Fong’s SBF interview features SBF expressing mild annoyance that people don’t get to see him spending several hours each day “ruminating” on the fine mess he finds himself in. His current outlook “certainly isn’t the future I once thought it was.”
However, channeling his noblest Bogart at the end of Casablanca speech, SBF said “what matters here is the world’s future.” SBF claimed “I was going to spend my life doing what I could for the world … but that got undermined because I fucked up.” There you have it: grieve not for yourselves, all ye bankrupted by SBF’s thieving, grieve for humanity.
Showing a rare flash of awareness, SBF admitted that “any apology from me would ring hollow,” but quickly reverted to the mean by saying “shit’s complicated … At the end of the day, there’s a limit to how bad I can feel for myself, given that it’s, like, my own damn fault to some extent [self-forgiving emphasis added] … it is what it is.”
So there you have it. Basically, if you had to sum up SBF’s impression of his role in the collapse of his crypto criminal empire and the devastating impact it’s having on hundreds of thousands of hapless retail traders, it would be this:
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