BlockFi Stops Withdrawals, Says FTX Chaos Can Only Get Worse

BlockFi Stops Withdrawals, Says FTX Chaos Can Only Get Worse

BlockFi, the crypto lender that was bailed out by FTX earlier this year, has suspended payouts less than two days after assuring users that it was fully operational.

In one tweet Late Thursday, BlockFi said it could not operate adequately due to uncertainty surrounding FTX.com, FTX US and Alameda Research. Co-founder Flori Marquez had just hours earlier tweeted The company remained an independent entity despite its rescue package with FTX – meaning it was largely unaffected by the ongoing crisis.

But events quickly turned around. The Hoboken, New Jersey-based company has now warned against deposits into BlockFi wallets or interest accounts.

"We are shocked and dismayed by the news regarding FTX and Alameda. We, like the rest of the world, learned of this situation via Twitter," BlockFi tweeted.

BlockFi's cracks are closely related to the lifeline it received in July when FTX agreed to support the lender with a $400 million credit facility as rival lenders Celsius and Voyager went bankrupt.

The rescue operation, now seen as part of a a series of bad FTX deals came with strings attached: Bankman-Fried could take over the company next year for just $240 million if he wanted.

It is not clear whether the troubled lender actually received the FTX credit facility. BlockFi did not respond to Blockworks' request for comment by press time.

Blockworks recently spoke with company insiders who detailed a number of problems at the lender, including a mentality focused on growing customer deposits that ultimately serve as liabilities.

As those deposits were withdrawn following SEC lawsuits and confidence in crypto lenders waned more broadly amid the demise of Celsius and Voyager, BlockFi's revenue and balance sheet suffered. Company documents obtained showed monthly revenue fell 70% from $48 million at the start of the year to about $15 million in July and August.

When BlockFi failed to find much-needed funding elsewhere, Bankman-Fried played the role of crypto savior. The fallen crypto mogul had said his firm was looking for responsible players with sustainable business models who could leverage short-term liquidity.

Jack Saracco, co-founder of digital bank Ping, said the industry's interconnectedness means the broader implications of FTX's collapse still need to be worked out.

“Across the industry, there is so much exposure to FTX that we just don't know about, on top of the exposure that we do know about,” he told Blockworks, adding that BlockFi's confidence in an FTX bailout that likely won't happen is part of it.

Noting that broader crypto adoption has now been set back, Saracco expressed frustration that “we don’t know who owns what in this bankruptcy mess.”

BlockFi is not the only company set to be bailed out by FTX

Sequoia, Multicoin Capital, Temasek and Paradigm are among the venture capital firms that could lose millions on their investment in FTX. Other investors should prepare for further turbulence.

But Voyager, another crypto lender, also relied on FTX to save face. In September, FTX.US won an auction to buy assets from bankrupt crypto lender Voyager for $1.4 billion. That deal was intended to make Voyager's customers whole, but the bankrupt company's unsecured creditors committee on Thursday Confirmed the transaction never took place.

Alameda Research, the trading firm founded by Bankman-Fried, agreed in June to lend $500 million to Voyager. At the time, many in the industry saw the series of bailouts as a positive step.

Fast forward to November and FTX is facing an $8 billion deficit, a figure that appears to include swaths of user funds. FTX is now critically stuck and is unlikely to help others, especially considering it cannot save itself. The Bahamas securities regulator on Thursday froze the assets of Bankman-Fried's Bahamas subsidiary and requested that a receiver be appointed for the company.

A Message from the American subsidiary of FTX, which had Bankman-Fried claims would not be affected by the mess, now says trading on the platform could cease in a few days. "Please close any positions you wish to close. Withdrawals are and will remain open," it said in a statement.

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The post BlockFi Stops Withdrawals, Hinting FTX Chaos Can Only Get Worse is not financial advice.