BlockFi/FTX: continuing to collapse shows that the ecosystem is not sustainable

Cryptocurrencies have a bright future, digital asset lender BlockFi implied on Monday. The problem is that the company said so in a filing with the US bankruptcy court.

BlockFi is one of the crypto businesses with the most exposure to Sam Bankman-Fried’s FTX. It briefly halted withdrawals from its platform after FTX went down this month. In its own bankruptcy filing on Monday, BlockFi bravely tried to distance itself from its move to seek protection from creditors from a similar move at FTX.

BlockFi argues that it could simply reorganize in the following weeks and appear on the other side revived.

The company could not have been as spectacularly mismanaged as FTX to be. But the sheer interconnectedness of the crypto industry suggests that the ecosystem is currently unstable for all participants.

According to court papers, BlockFi has debt up to 10 billion dollars includes customer accounts and settlement payments it owes to the U.S. Securities and Exchange Commission. However, its complicated relationship with FTX is the most interesting detail.

FTX rescued BlockFi during the first crypto meltdown in the spring when the terra-luna stablecoin collapsed. BlockFi has secured a $400 million emergency line of credit, which also gives FTX a cheap option to buy BlockFi outright.

At the same time, FTX’s trading arm, Alameda Research, borrowed nearly $700 million from BlockFi. The BlockFi cryptocurrency is also currently stuck on the FTX platform. The Financial Times reported on Monday that BlockFi is Bankman-Fried to acquire shares of internet stockbroker Robinhood. BlockFi alleges that he mortgaged them to secure loans made by his FTX empire.

BlockFi’s bright prospects seem unrealistic for two reasons. First, it requires that the FTX case associated with it be resolved quickly. Given the mess of the case, that’s not possible. Second, it is not clear that the crypto sector is stable and healthy enough for a successful reorganization. BlockFi only lasted through the spring when then-mighty FTX came along with a bailout.

A rough few months in crypto have knocked the likes of Three Arrows Capital, Voyager Digital, Celsius Network, FTX and now BlockFi, with others likely to spring up. There are tactical reasons for BlockFi and its lawyers to put on a brave face. But there is little reason to imagine that the crypto ecosystem could become stable or sustainable in its current form.


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