Setback For BlockFi Users As Judge Rules Against Recovering $300M

BlockFi, a cryptocurrency lending platform, faced a major setback when a US Bankruptcy Judge ruled against a petition filed by some of its users to recover $300 million in Bitcoin and turn it over to them. The company had filed for bankruptcy in 2022 following the collapse of several crypto lenders amid turmoil in the cryptocurrency space. The decision is considered standard in other similar cases, where judges have sided with the crypto companies when determining whether users that held interest-bearing accounts could retain ownership of their coins.

The situation in the crypto space worsened thanks to the collapse of FTX, the parent entity of several lenders, including BlockFi. Several questions about the ownership of customer funds were raised during the bankruptcy proceedings of other lenders, such as Voyager Digital and Celsius Network. In those cases, judges ruled that funds held in interest-bearing accounts were the property of the bankrupt company and would be pooled with other assets and used to repay creditors.

BlockFi’s case was especially complicated as the division between account types on the platform became confusing following the freezing of accounts by the company on the 10th of November, shortly before filing for bankruptcy. The lack of communication between BlockFi and its users was cited as the basis of the decision, and the judge called the situation “confusing, misleading, and frustrating.” Some BlockFi users attempted to transfer around $375 million from their interest-bearing accounts into their wallets following BlockFi’s shutdown, but they received incorrect information.

Lawyers representing the group of customers argued that BlockFi should honor the transfers and return the funds to the affected customers. However, Judge Kaplan ruled that BlockFi’s terms of service allowed the company to block transfer requests as part of its shutdown. Michael Slade, the attorney for BlockFi, had argued that allowing the customers to transfer $375 million would significantly impact the recovery process for Wallet customers and could possibly prevent the company from returning customer funds due to the difficulty involved in sorting out how to pay additional wallet claims from a fixed asset pool.

However, there was some good news for some customers as the bankrupt crypto lender received court permission to return around $297 million to customers with non-interest-bearing accounts. Bankruptcy judge Michael Kaplan ruled that customers were the owners of their deposits in BlockFi’s wallet program, which did not pay out interest to customers and kept these funds separate from the company’s other funds.

In summary, the judge’s decision was a major setback for some BlockFi users who unintentionally forfeited their right to the crypto assets held on the bankrupt lending platform. The decision is consistent with those in other similar cases, and it highlights the importance of communication between companies and their customers in the cryptocurrency space. While the ruling may seem harsh, it is a reminder that customers need to understand the terms of service and the risks associated with investing in cryptocurrencies.