In this blog, we'll take you through the events leading to BlockFi's bankruptcy, explain the key reasons behind it, and offer alternatives for secure crypto management.

What is BlockFi?

BlockFi was a cryptocurrency lending platform that allowed users to lend and borrow digital assets. Founded in 2017, BlockFi quickly rose to prominence by offering high-interest rates on crypto deposits and facilitating crypto-backed loans. The platform gained popularity for providing financial services that traditional banks typically don't offer to crypto holders.

What Happened to BlockFi?

BlockFi's downfall began in mid-2022 when it faced significant liquidity issues following the collapse of Terra's stablecoin. The situation worsened when its primary backer, FTX, went bankrupt in November 2022. BlockFi had substantial exposure to FTX, which led to a cascading effect, ultimately pushing BlockFi into bankruptcy.

The Rise and Fall of BlockFi: A Timeline

Founding (2017)

BlockFi was founded in 2017, with a mission to bridge the gap between cryptocurrencies and traditional financial products.

BlockFi's Business Model (2018)

The company offered high-yield crypto savings accounts and crypto-backed loans, attracting a large user base.

Rapid Growth (2019-2020)

BlockFi experienced rapid growth, with significant increases in customer deposits and assets under management.

Alameda Research Investment (June 2022)

In a bid to stabilize, BlockFi received a major investment from Alameda Research, affiliated with FTX.

Regulatory Challenges (2020-2022)

The company faced increased regulatory scrutiny, with several warnings and fines from U.S. regulators over its interest-bearing accounts.

Alameda Defaults (November 2022)

Alameda Research defaulted on its loans, exacerbating BlockFi's financial troubles.

FTX Collapse (November 2022)

The collapse of FTX in November 2022 had a devastating impact on BlockFi, leading to its own liquidity crisis.

Bankruptcy Proceedings (November 2022)

BlockFi filed for bankruptcy in November 2022, citing substantial exposure to FTX and Alameda Research.

Emergence from Bankruptcy (October 2023)

On October 24, 2023, BlockFi announced it had emerged from bankruptcy and began allowing withdrawals for wallet customers while preparing distributions for interest account and loan customers​​​​​​.

BlockFi Web Platform Shutdown (May 2024)

BlockFi’s web platform shut down on May 31, 2024. Clients were advised to download their transaction history, tax forms, and any other important data from the platform before that date​​.

Why Did BlockFi Go Bankrupt?

BlockFi's bankruptcy can be attributed to several key factors:

Liquidity Crisis

BlockFi's dependency on high-risk, high-reward strategies left it vulnerable to market volatility.

Exposure to high-risk DeFi yield farming strategies

These involve lending or staking assets in decentralized finance protocols to earn high returns, but also come with considerable risks of loss due to market volatility and regulatory scrutiny.

Read more: Cefi vs Defi - Key Differences Explained

Exposure to FTX & Alameda

BlockFi had over $1.2 billion in assets tied up with FTX and Alameda Research, whose collapse precipitated BlockFi's financial woes.

Regulatory Issues

Continuous regulatory challenges and fines eroded investor confidence and added financial strain.

Response from BlockFi Executives

BlockFi executives have largely blamed their bankruptcy on their exposure to FTX and Alameda Research. They have emphasized their efforts to recover assets and distribute them back to their creditors. The company's restructuring plan received significant support, with 90% approval from voting creditors.

What Happened to BlockFi Customers and Their Money?

BlockFi estimated that it owed somewhere between $1 billion and $10 billion to more than 100,000 creditors.

BlockFi customers were affected differently based on the type of account they held. 

Wallet customers could submit withdrawal requests, while interest account and loan customers received distributions starting in early 2024. 

BlockFi indicated that it was unlikely to fully repay customers who had interest-bearing accounts, with estimated recoveries ranging from 39.4% to 100%​.

Are There Any BlockFi Alternatives?

Founded in 2018, Ledn offers a crypto lending platform that allows clients to access US loans secured by BTC or ETH , and earn interest on their digital assets held in Ledn’s Grow accounts securely and transparently.

With Ledn, you can always expect:

Transparency

Ledn is the first in the crypto lending industry to offer Proof-of-Reserves, verified independently by a Certified Public Accountant. Clients can confirm their balances are accounted for through biannual attestations. Additionally, Ledn issues monthly Open Book Reports, offering insights into how assets are used.

Competitive Rates

Ledn offers competitive lending and savings or Growth account rates by conducting thorough due diligence on all counterparties. This helps clients maximize their returns while maintaining high standards of security.

Rigorous Risk Management

Ledn's robust risk management and due diligence processes ensure collaboration only with high-quality institutions and reliable assets. They support highly liquid assets like BTC USDC, ETH and USDT, ensuring a stable lending environment.

Read more: 15 Best Crypto Loan Platforms In 2024

What Services does Ledn Offer?

Savings Accounts

Ledn offers interest-bearing growth accounts, providing a way to earn interest on your holdings. The interest rates are competitive and updated regularly based on market conditions.

Crypto-Backed Loans

Ledn allows users to borrow fiat currency by using crypto as collateral. All you need is the minimum 1,000 USD equivalent in BTC or ETH collateral and you are automatically approved without any further credit check required. Loans are typically funded within 24 hours of approval. They can be paid back at any time without penalties, and no monthly payments are required.

B2X Loans

This unique product allows users to double their Bitcoin holdings by using their existing Bitcoin as collateral to borrow more Bitcoin. This product is aimed at those looking to increase their exposure to Bitcoin.

Why is Ledn More Secure than BlockFi?

Ledn is more secure than BlockFi due to its stringent risk management practices and selective lending approach. 

Ledn generates yield by lending exclusively to institutional market makers with substantial experience in traditional finance, ensuring robust creditworthiness.

It implements strict credit underwriting requirements, including regular transparency on borrowers' financial positions, thorough understanding of their revenue-generating strategies, and close relationships with senior management. 

Unlike BlockFi, Ledn avoids high-risk DeFi yield farming strategies, focusing instead on the tenor matching of assets and liabilities and maintaining strict credit underwriting independent of collateralization. This comprehensive approach significantly reduces the probability of loan losses during market stress. 

Conclusion

BlockFi's bankruptcy is a lesson in the importance of robust risk management and regulatory compliance in the crypto industry. Ledn is a reliable alternative lending platform for secure and transparent crypto management.

Start securely growing your assets today with Ledn.

Disclaimer

This article is sponsored by 21 Technologies Inc. and/or its subsidiaries (“Ledn”) and is for general information, discussion, or educational purposes only and is not to be construed or relied upon as constituting legal, financial, investment, accounting, tax, estate-planning, or other professional advice or recommendation. Please read Ledn’s full Risk Disclosure Statement and Disclaimers.