The fallout from the demise of cryptocurrency exchange FTX has reached the crypto deposit and lending platform BlockFi, which announced at 1.15am GMT on 11 November that it was suspending client withdrawals.
BlockFi said it was stopping clients from redeeming because of the continuing lack of clarity on the status of FTX and Alameda, the proprietary trading firm set up by FTX founder Sam Bankman-Fried and to which FTX has allegedly lent up to $10bn in client assets.
“We are shocked and dismayed by the news regarding FTX and Alameda,” BlockFi said.
FTX had agreed to buy BlockFi earlier this year, as well as extending the lending platform up to $400m in credit, after BlockFi ran into trouble following the cryptocurrency market’s decline.
At the time, FTX boss Bankman-Fried was likened by several publications to JP Morgan for his willingness to bail out failing cryptocurrency businesses.
However, cryptocurrency lending and deposit platforms had also faced increasing pressure from regulators concerned about their ability to back promises to clients.
BlockFi grew significantly during the 2020/21 cryptocurrency mania by promising near-double-digit interest rates on client deposits of bitcoin, ethereum, tether and other digital assets.
As at the end of Q2 2022, BlockFi had around $4bn in assets, a significant fall from a peak of $14.7bn in March 2021.
In February, the Securities and Exchange Commission (SEC) fined BlockFi $50m for what it said were materially false and misleading statements on BlockFi’s website about the risks facing clients.
According to the SEC, BlockFi had failed to register the offers and sales of its retail crypto lending product, the firm made loans of cryptocurrency to institutional investors without ensuring adequate backing, while at the same time misrepresenting the risks to retail investors.
“From the time of BlockFi’s launch of its interest account on March 4, 2019 and continuing to August 31, 2021, BlockFi made a statement in multiple website posts that its institutional loans were ‘typically’ over-collateralized, when in fact, most institutional loans were not,” the SEC said.
BlockFi’s demise comes four months after another crypto lender, Celsius, declared bankruptcy, leaving depositors on the platform as unsecured creditors, likely to receive little or none of their money back.
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