The insolvent cryptocurrency lender BlockFi is striving to obstruct efforts from the also bankrupt entities, FTX and Three Arrows Capital (3AC). These efforts are aimed at recovering hundreds of millions to repay their own debtors.
On Aug. 21, in a submission to a New Jersey bankruptcy court, BlockFi stated that its creditors should not be deprioritized just because FTX allegedly misused the $5 billion that BlockFi had loaned to them.
“FTX is attempting to reclaim from more than $5 billion worth of claims against BlockFi’s assets, directly affecting the true victims of FTX’s deceptive practices: BlockFi’s clients and its other genuine creditors,” the statement read. BlockFi further suggested that, “To shield BlockFi’s creditors from more unfair treatment, the Court should reject the claims made by FTX based on the principle of ‘unclean hands’.”
The documents also revealed that FTX had earlier extended $400 million to BlockFi in June 2022 and had purchased a stake in BlockFi following a loan agreement. However, BlockFi emphasized that this wasn’t a conventional loan agreement. It was an uncollateralized loan with a tenure of 5 years, having an interest rate significantly lower than the market rate. Payments were not due until the projected maturation of the company. BlockFi termed FTX’s financial commitment as a “risky venture”, suggesting that its own creditors shouldn’t bear the brunt of it.
“FTX’s deceptive practices resulting in their own investment failure shouldn’t translate to a burden on BlockFi’s creditors to compensate the investment amount,” was the counterargument. Reports indicate that BlockFi has a debt of nearly $10 billion to more than 100,000 creditors, which includes $1 billion due to its top three creditors and another $220 million to the insolvent crypto hedge fund, 3AC.
According to BlockFi, 3AC misused the funds they borrowed, thereby arguing that they shouldn’t expect any potential repayment.
The legal battles that BlockFi faces against entities like FTX, 3AC, among others, might set them back by up to $1 billion, affecting the amount payable to their creditors. Some of BlockFi’s creditors had, in the past, alleged that the company ignored various warning signs when engaging with FTX and its trading affiliate, Alameda Research, especially leading up to FTX’s financial downfall in November 2022.
Nevertheless, a consensus for a repayment strategy was reached between the creditors and BlockFi the previous month.
It was on Nov. 28 that BlockFi initiated their Chapter 11 bankruptcy proceedings, a mere fortnight after FTX did the same.
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