Crypto lender BlockFi allegedly used customer funds to buy $30 million insurance

• BlockFi’s creditors have claimed that the company used customer funds to buy insurance for $30 million.
• Customers also argued that the lender purposefully delayed the trial.

In response to BlockFi’s latest restructuring proposal, disgruntled creditors of the insolvent cryptocurrency lending startup have filed a fresh court case.

The firm filed its Chapter 11 reorganization plan with the U.S. Bankruptcy Court in Trenton, New Jersey last Friday. Since it owes roughly $1.3 billion to its top 50 creditors, selling BlockFi may not create enough value for creditors, the firm argued.

Earlier today, we filed our disclosure statement with the Court. This is an important step forward in our chapter 11 cases toward our goal of maximizing recoveries for our clients: https://t.co/6lnZmLOwG8

— BlockFi (@BlockFi) May 13, 2023

BlockFi creditors submitted another court filing in response on 15 May, arguing that the firm purposefully delayed the trial.

Creditors’ arguments against Blockfi

BlockFi creditors stated that the firm sold over $240 million in cryptocurrency before declaring bankruptcy in late November 2022. The creditors emphasized that the crypto lender sold the assets during the massive market slump following the FTX debacle. The creditor subsequently transferred the fund and an additional $10 million into Silicon Valley Bank (SVB), which went bankrupt in March this year.

BlockFi users also asserted that the corporation spent $22.5 million of their deposited funds to purchase a $30 million insurance coverage. According to the creditors, this occurred shortly after BlockFi auctioned off its digital assets before declaring bankruptcy.

The creditors requested that the court resolve the matter as soon as possible by transferring the estate’s assets into the control of new management. They reiterated that such a situation does not appear to be compatible with the debtors’ case agenda.

A recent ruling stated that following its bankruptcy, BlockFi was slated to repay over $300 million to custodial wallet customers, while keeping $375 million in interest-bearing accounts.

While the company received $4.7 million from the sale of mining equipment, considerable recoveries are dependent on the firm’s claims against Alameda and FTX, with around $355 million in tokens frozen on FTX and a $671 million loan to FTX’s affiliate, Alameda Research.

The creditors dismissed BlockFi’s claim that it was a victim of FTX and Alameda as a “false case narrative,” blaming the company’s downfall on poor management decisions and, later, restructuring agents.