BlockFi obtains court approval to return $297 million to clients
Bankrupt cryptocurrency lender BlockFi was granted court permission Thursday to return $297 million (roughly Rs. 2,439 crores) to customers with non-interest bearing accounts, without reimbursing customers who tried to move money into those accounts at the last minute.
US Bankruptcy Judge Michael Kaplan in Trenton, New Jersey ruled that customers owned their deposits in BlockFi’s Wallet program, which did not pay interest and kept customer deposits separate from other BlockFi funds. Kaplan ruled out that customers with interest-bearing accounts did not own their deposits, which were transferred to BlockFi for use in its broader lending business.
BlockFi was one of several cryptocurrency lenders that went bankrupt in 2022, and questions have also been raised about ownership of customer funds in the Celsius Network and Voyager Digital bankruptcies. The judges in those cases ruled that the money in the interest-bearing accounts was the property of a bankrupt company, to be pooled with other assets and used to pay off all creditors at a later date.
BlockFi’s division between the two account types became blurred when BlockFi froze the accounts on November 10 shortly before filing for bankruptcy without fully disabling the app’s customer-handling functions, creating a situation Kaplan described as “confusing, misleading, and frustrating.”
About 48,000 BlockFi customers attempted to transfer $375 million (roughly Rs. 3,080 crores) from interest-bearing accounts to Wallet accounts during the BlockFi shutdown on November 10, and received in-app and email confirmation that the transfers had completed. Lawyers for these clients argued that BlockFi should honor the transfers and return the funds to those clients as well.
But BlockFi never did the back-end work required to complete transfers between the two account types, and its terms of service allowed it to block transfer requests as part of its broader shutdown, Kaplan ruled out.
“Quite simply, the customer requesting a withdrawal or transfer on the user interface does not and will not automatically transfer the digital assets,” Kaplan said.
BlockFi’s attorney, Michael Slade, argued in a previous court hearing that allowing transfers of $375 million (roughly Rs. 3,080 crores) would severely impair the recovery of Wallet customers and potentially prevent BlockFi from returning any funds to customers, given the practical difficulty in screening. Learn how to pay additional portfolio claims from a fixed pool of assets.
BlockFi filed for Chapter 11 protection in November, citing volatility in cryptocurrency markets and exposure to cryptocurrency exchange FTX, which collapsed amid revelations that customer funds were missing from the exchange.
© Thomson Reuters 2023