The Breakdown - BlockFi Files for Bankruptcy, Becoming Latest FTX Domino

Episode Date: November 29, 2022

This episode is sponsored by Nexo.io, Circle and Kraken. On today’s episode, NLW returns to his usual daily programming with a review of crypto contagion that took place during the last week. He looks at BlockFi, which filed for Chapter 11 bankruptcy protection in New Jersey today, as well as Genesis and FTX itself.  (Genesis Global Capital is a subsidiary of Digital Currency Group, the parent company of CoinDesk.)  - Nexo Pro allows you to trade on the spot and futures markets with a 50% discount on fees. You always get the best possible prices from all the available liquidity sources and can earn interest or borrow funds as you wait for your next trade. Get started today on pro.nexo.io. - Circle, the sole issuer of the trusted and reliable stablecoin USDC, is our sponsor for today’s show. USDC is a fast, cost-effective solution for global payments at internet speeds. Learn how businesses are taking advantage of these opportunities at Circle’s USDC Hub for Businesses. - Kraken, the secure, trusted digital asset exchange, is our sponsor for today’s show. Kraken makes it easy to instantly buy 185+ cryptocurrencies with fast, flexible funding options. You’re covered by industry-leading security and award-winning Client Engagement, available 24/7. Sign up and trade today at kraken.com. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsors today is "Back To The End" by Strength To Last. Image credit: PM Images/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

we got confirmation of what was widely expected as Block 5 filed for Chapter 11 bankruptcy protection in New Jersey. According to official releases, the company has about $257 million of cash on hand. They estimate both their assets and liabilities between $1 billion and $10 billion, and they estimate more than 100,000 creditors. Some of the largest of those include Ankura Trust Company, which has a $730 million unsecured claim, FTCS, which has a $275 million unsecured claim, and the good old SEC, which has a $30 million unsecured claim. As you might imagine, much hay is being made out of that particular creditor. Welcome back to The Breakdown with me, NLW.

It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, Circle, and Cracken, and produced and distributed by CoinDes. What's going on, guys? It is Monday, November 28th, and today we are talking about Block Fies bankruptcy. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, folks, welcome back. I hope you had a wonderful Thanksgiving week for those of you here in the U.S. And for everyone else, I hope you enjoyed the

grateful for Bitcoin series. I had a ton of fun in those conversations, and And if you did as well, hop in the Discord and let me know what episodes and topics you were most interested in. We've got a number of end-of-year interviews coming up, many of which will have similar themes, so please, please let me know what you want to hear more about. All right, well, today we're catching up on a bunch of news that has happened over the last week. However, where we have to start is something that seems like it's been a long time coming and is now officially here.

BlockFi has filed for bankruptcy. The saga of BlockFi has been a roller coaster. The company was a superstar, raising $350 million at a $3 billion valuation just last March of 2021. By July of that year, the company was discussing going public. However, by later in the summer and early in the fall, the once high-flying company ran into trouble when various U.S. state securities agencies started asking, hey, where is that yield coming from? This led to some contentious legal battles and eventually, in February of this year, 2022,

a settlement with the SEC. From the SEC's own press release, the Securities and Exchange Commission today charged BlockFi lending LLC with failing to register the offers and sales of its retail crypto lending product. In this first of its kind action, the SEC also charged BlockFi with violating the registration provisions of the Investment Company Act of 1940. To settle the SEC's charges, BlockFi agreed to pay a $50 million penalty, cease its unregistered offers and sales of the lending product, BlockFi interest accounts, BIAs, and attempt to bring its business within the provisions of the investment company act within 60 days.

BlockFi's parent company also announced that it intends to register, under the Securities Act of 1933, the offer and sale of a new lending product. In parallel actions announced today, BlockFi agreed to pay an additional $50 million in fines to 32 states to settle similar charges. Now, that would be a big hit for any company if that was all they were dealing with. However, in June, BlockFi was back in the news around the failure of Three Arrow's Capital. On June 16th, Blockfi CEO, Sack Prince, wrote, I've been seeing a lot of speculation about BlockFi's risk management practices that I want to address. While our policy is not to comment on specific counterparties, we are committed to providing as much transparency as possible, and it's important to know the following.

BlockFi's risk management practices and system allow us to act decisively to mitigate risk in accordance with our contracts. These actions may include margin calls and asset liquidation when appropriate. BlockFi can confirm that we exercised our best business judgment recently with a large client that failed to meet its obligation on an over-collateral. marginalized margin loan. We fully accelerated the loan and fully liquidated or hedged all the associated collateral. Now, while BlockFi never actually confirmed that that large counterparty was three arrows capital, it's largely assumed that that is in fact the case. Despite this Twitter thread, however, rumors of BlockFi's insolvency remained. A few days before the 3AC announcement, they had said that they were trimming headcount by 20%, or about 170 people. And only a few days later,

on June 21st, BlockFi announced that they had secured a $250 million revolving credit facility from FTX. By July 1st, that facility was up to $400 million, and it came with an option for FTCS U.S. to acquire BlockFi. The acquisition option price was up from reports of a paltry 25 million in the previous week, but was still only for 240 million based on certain performance triggers, which is a significant discount from the $3 billion the company was worth just a year and a half earlier. Now, given all this, when FTX failed, many people assumed that BlockFi might be one of the dominoes to fall. On November 10th, BlockFi announced via Twitter that they would pause withdraw citing a, quote, lack of clarity over the situation with FTX and its various subsidiaries.

Today, 18 days later, we got confirmation of what was widely expected then as Block 5 filed for Chapter 11 bankruptcy protection in New Jersey. According to official releases, the company has about $257 million of cash on hand. They estimate both their assets and liabilities between $1 billion and $10 billion, and they estimate more than $100,000 creditors. Some The largest of those include Ankara Trust Company, which has a $730 million unsecured claim, FTCS, which has a $275 million unsecured claim, and the good old SEC, which has a $30 million unsecured claim. As you might imagine, much Hay is being made out of that particular creditor. Speculation is running wild now about what Sam might have done with BlockFi.

Former Bitmex head, Arthur Hayes, said, I can't wait to see this balance sheet. Did SBF stuffed BlockFi with FTT in order to collateralize loans to Alameda that came from BlockFi customers? Anyways, to the extent that reactions are muted on crypto-Twitter, it's only because this one has been so expected. And given that a lot of BlockFi's most recent problems are FTX related, let's also chat now about what has been going on with that situation, and there is a lot. Want to keep more profits when trading? Get the best possible prices and trade with 50% lower fees on Nexo Pro. The new Spot and Futures trading platform uses aggregated liquidity of over 3,000 order books collected from multiple sources.

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To sum up where we left off, the last non-interview show was Saturday, November 19th. At that point, we had discussed how the $420 million meme raise went directly into Sam's pockets, how Sam's white-collar crime lawyers had fired him as a client, how the SEC, the CFTC, and the DOJ all said they're investigating, and how new CEO chief overseeing the restructuring John Ray claimed that the Bahamian bankruptcy was at odds with the U.S. process, and further, that given that the... the Bahamas asked for FTX to transfer some assets to them after the Chapter 11 bankruptcy was declared,

that they might actively be compromised as well. And this gets us to one of the stranger dimensions of this whole conflict, which is the international dimension. On Sunday night, Ryan Pinder, who's the Bahamas Attorney General, as well as the Senator and the Minister for Legal Affairs, made a national address detailing the nation's view of the FTX collapse. One might hope that he would use this as a chance to denounce the fraudulent practices that the company perpetuated. But, alas, that is not what we saw. Instead, Pinder characterized the collapse as a, quote, insolvency crisis, which has been, quote, experienced around the world in practically every sector. He claimed that the case should be

properly understood as a, quote, very large business failure as a result of questionable internal management practices and corporate governance. He viewed the catalyst of the FTC collapse as the exchange suffering a liquidity crunch or a run on the bank. And of course, we've seen this framing in media sources as well, basically blaming Binance CEO, CZ for instigating a bank run on a competitor, and treating the collapse as a normal corporate failure rather than asking why FTCS failed to be able to service customer withdrawals, especially given that their terms of service laid out the customer funds were held on trust rather than used for other purposes. Now, sidebar, this is one of the most important things to be paying attention to right now,

as relating this entire situation. It is extremely clear that Sam is trying to turn this story, his FTC's story, into one of managerial incompetence rather than fraud and deception. This is, to be clear another lie. Don't get me wrong, there was incompetence to be sure, but it was incompetence that happened on the back of illicitly shipping billions of dollars of customer funds that he had promised not to, to a hedge fund to do God knows what with, which is not incompetence but fraud. If there's one thing to keep repeating, it is that fundamental truth in this situation. Anyway, the biggest thing about the whole Bahamas speech was that it was a clapback at John J. Ray for accusing them of potentially being involved in some of the nefarious practices.

Regarding John Ray's remarks, Senator Pinder noted that there were ongoing civil and criminal investigations, which should not be commented on and said, quote, we urge all authorities here and abroad at a minimum to exercise at least the same amount of prudence and restraint in their public commentary as we do so as not to prejudice any of the proceedings that are ongoing. Directly speaking to the U.S.-based bankruptcy proceedings, Pinder suggested that, quote, it is possible that the prospect of multi-million dollar legal and consultancy fees is driving both their legal strategy and their intemperate statements. and went on to, quote, urge prudence and accuracy in all future filings in all matters.

Any attempt to lay the entirety of this debacle at the feet of the Bahamas, he said, would be a gross over-simplification of reality. We have been shocked at the ignorance of those who have said that FTC came to the Bahamas because they did not want to submit to regulatory scrutiny, end quote. Now, it's clear from Sam's statements that he sees aligning with the Bahamas jurisdiction over the U.S. as key to the existential battles he's fighting. Since his long, meandering, non-apologetic 32-tweet tweet thread on November 16th, he's had just five retweeter quote tweets.

Four of those were regarding this speech, which I think gives clear further evidence of where Sam sees his alignment. What's the fifth quote tweet you might be asking? Oh, just confirmation that Sam will be speaking with the New York Times' Andrew Ross Sorkin at the Deal Book Summit on Wednesday. Wait, what? Yep. On Wednesday, November 30th, the New York Times will charge $2,49 for participants to hear from

speakers including Ukraine's President Zelensky, Mark Zuckerberg, former Prime Minister of Israel, Benjamin Netanyahu, former U.S. Vice President Mike Pence, and Sam. Now, the crypto community was livid, but deal book founder and New York Times editor Andrew Ross Sorkin defended the move, saying in a tweet, there are a lot of important questions to be asked and answered. Nothing is off limits. Looking forward to it. Look, I won't lie when I say that this is one of the most frustrating parts of this entire affair. I've spent a lot of times behind the scenes and in my DMs telling journalists asking for commentary exactly what I think of coverage so far. I don't want this to overwhelm today's show, which is really meant as a catch-up, and I'm sure that we'll talk more about it after that appearance

on Wednesday. But just to leave it, I'll quote a couple of folks who I think have the right of it. Lynn Alden tweeted, SBF remains unarrested and invited to major New York Times conferences. It's beyond weird at this point. Mikey Polito from Blockworks just asked the question, what's the argument for why the New York Times is so nice to SPF still. Hard to believe a top five all-time financial criminal is getting this treatment. What's more, it's not just the New York Times. Regarding a Wall Street Journal article called Sam Bankman-Fried said he would give away billions, broken promises are all that's left.

Noah Bloom from the ambitious crossover attempt podcast writes, he did not have a plan to save the world. He had a plan to make people think he was going to save the world, instead of buying his parents a $121 million mansion in the Bahamas. You've been had. These stories are like hearing the Nigerian, scam them is going to prison and think, I hope he cut me that $10 million check before he got arrested.

Finally, Zach Vol writes, FTX exploded two weeks ago. SBF is having Thanksgiving dinner in a penthouse with his family. The New York Times will interview him next week. Amazon is already planning an eight-part miniseries about it with two Marvel directors. Clown World doesn't even begin to describe it. Now, all of that said,

the New York Times did write an article on the 23rd that has caused a major stir. Cryptoferm FTC's ownership of the U.S. Bank raises questions. The super TLDR of this is that Alameda Research invested $11.5 million in a tiny little bank called Farmington State Bank earlier this year. At the time of the investment, it was the nation's 26th smallest bank out of 4,800. Its net worth was $5.7 million, according to the FDIC. And remember, this was an $11.5 million investment. So why would FTX and Alameda be interested in this bank? Well, it's not exactly clear. What is clear, however, is that in 2020, the bank

was bought by FBH. The chairman of FBH is John Chalepin, who is also the chairman of Deltech Bank, which is also based in the Bahamas and whose best known client is Tether. I am not going all the way down the rabbit hole today, because I think this is going to be a topic that keeps coming up. But I will quote Camden Fine, a bank industry consultant who said, the fact that an offshore hedge fund that was basically a crypto firm was buying a stake in a tiny bank for multiples of its stated book value should have raised massive red flags for the FDIC, state regulators, and the Federal Reserve. It's just astonishing that all of this got approved. So where we are now with the FTX saga is that we are at the hearing stage of this problem.

The Senate Ag Committee is holding a hearing on Thursday titled Why Congress Needs to Act, lessons learned from the FTX collapse. And on December 13th, the Financial Services Committee in the House will hold a hearing called Investigating the Collapse of FTX Part 1. The European Parliament will also hold a hearing on FTX on Wednesday. Now, as we wrap up, what about the other big contagion follow that everyone has been watching and worrying about, which is, of course, Genesis and by extension, the digital currency group. Going into Thanksgiving week, there were rumors of a sizable hole in the balance sheet of either

Genesis or DCG. Withdrawals from Genesis lending had been halted, impacting institutional access to credit across the industry, and impacting retail yield products, including Gemini's offering. In truth, there just haven't been very many updates. On Friday, Barron's reported that several state regulators were looking into whether Genesis had violated securities laws, but that obviously wasn't where people were focused. And in some of the first of the ways crypto-Twitter's discussion about all of this has just been trying to look at different scenarios, especially those regarding any potential unwinding of the grayscale Bitcoin trust. For now, unfortunately, we don't have any useful updates, but I expect that we'll see

something in the next couple days. So that is where we are starting coming off of Thanksgiving heading into December. I'm sure that there are going to be fireworks to go with this warm holiday month coming up, but hopefully there are a little bit more about the conclusion of the last chapter than anything new and unexpected. Fingers crossed. For now, I want to say thanks again to my sponsors, nexus.com.com, and crackin. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.