BlockFi/FTX: further collapse suggests ecosystem is unsustainable

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

BlockFi was one of the crypto businesses most exposed to Sam Bankman-Fried’s FTX. It quickly halted withdrawals from its platform after FTX went under this month. In its own bankruptcy filing on Monday, BlockFi valiantly attempted to distance its move to seek protection from creditors from the same move at FTX.

BlockFi argued that it could simply reorganise in the following weeks and come out the other side revitalised.

The company may not have been spectacularly mismanaged as FTX was. But the sheer interconnectedness of the crypto industry suggests the ecosystem is now inherently unstable for all participants.

According to court papers, BlockFi has up to $10bn in liabilities which include customer accounts and settlement payments it owes the US Securities and Exchange Commission. Its complicated relationship with FTX, however, is the most interesting detail.

FTX rescued BlockFi during the first wave of crypto distress in the spring when the terra-luna stablecoin collapsed. BlockFi secured an emergency credit line of $400mn which also gave FTX a cheap option to buy BlockFi outright.

At the same time, the trading arm of FTX, Alameda Research, itself had borrowed nearly $700mn from BlockFi. BlockFi cryptocurrency is also currently stuck on the FTX platform. The Financial Times reported on Monday that BlockFi was suing Bankman-Fried to seize his shares of internet stockbroker Robinhood. BlockFi alleged he had pledged them to secure borrowings made by his FTX empire.

BlockFi’s sunny outlook seems unrealistic for two reasons. First, it requires that the FTX case, with which it is intertwined, be resolved quickly. Given the messiness of the case, that is unlikely. Second, it is not obvious that the cryptocurrency sector is stable and healthy enough for a reorganisation to succeed. BlockFi only survived the spring when the then mighty FTX arrived with a bailout.

A rough few months in crypto have felled the likes of Three Arrows Capital, Voyager Digital, Celsius Network, FTX and now BlockFi, with others likely teetering. 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 can become stable or sustainable in its current form.