The collapse of BlockFi, once considered one of the most promising crypto lending platforms, marked a watershed moment in the cryptocurrency industry. Triggered by the implosion of FTX, BlockFi’s bankruptcy in late November 2022 revealed just how interconnected the crypto ecosystem had become, and how one major player’s collapse could send shockwaves throughout the sector.
This article explores the story in depth—tracing BlockFi’s rise, its partnership with FTX, the chain of events leading to its bankruptcy, and the broader implications for investors, regulators, and the global crypto market.
1. BlockFi: The Rise of a Crypto Lending Pioneer
BlockFi, founded in 2017, sought to bridge traditional financial services with the burgeoning cryptocurrency world. Its core offerings included:
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Crypto-backed loans: Customers could borrow against Bitcoin or Ethereum holdings.
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Interest accounts: Investors could earn yields on deposited digital assets.
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Institutional services: BlockFi expanded into providing liquidity and credit to large institutions.
By 2021, BlockFi had achieved unicorn status, boasting a valuation of nearly $3 billion. It was a key player in the narrative of “crypto as the future of finance.”
However, its business model—offering high yields while lending out customer deposits—was inherently risky, especially in a market as volatile as crypto.
2. The Partnership with FTX
When crypto markets began cooling in 2022, BlockFi struggled with liquidity. Enter FTX, the exchange led by Sam Bankman-Fried.
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In mid-2022, FTX extended a $400 million revolving credit facility to BlockFi, effectively bailing out the firm during a period of stress.
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FTX also secured an option to purchase BlockFi outright for up to $240 million.
At the time, the deal was hailed as a lifeline for BlockFi. But it also created deep reliance: BlockFi now depended heavily on FTX for survival.
3. The Collapse of FTX
In November 2022, the crypto world was rocked by revelations that FTX and its trading arm Alameda Research had misused customer funds, creating an $8 billion hole.
Within days:
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FTX faced a liquidity crisis, halting withdrawals.
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Both FTX and Alameda filed for Chapter 11 bankruptcy.
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Sam Bankman-Fried, once seen as a crypto savior, was indicted for fraud and later sentenced to decades in prison.
For BlockFi, this spelled disaster. Its largest financial backer had collapsed, and significant portions of its own assets were frozen on FTX’s platform.
4. BlockFi’s Bankruptcy Filing
On November 28, 2022, BlockFi and eight affiliates filed for Chapter 11 bankruptcy protection in New Jersey.
Key details from the filing included:
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Assets and Liabilities: Each estimated between $1 billion and $10 billion.
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Cash on Hand: Approximately $256 million remained.
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Major Creditors:
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Ankura Trust (owed around $729 million).
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FTX US (owed around $275 million).
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The U.S. Securities and Exchange Commission (owed $30 million from a prior settlement).
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The bankruptcy filing highlighted not only BlockFi’s reliance on FTX but also the cascading risk within the crypto sector.
5. Exposure to Alameda Research
BlockFi was further entangled with Alameda Research, which defaulted on loans totaling nearly $680 million. The dual hit—frozen assets on FTX and defaults by Alameda—made it impossible for BlockFi to meet obligations.
This demonstrated the hidden fragility of the crypto ecosystem: many firms were lending to each other, creating a house of cards that collapsed when one major player failed.
6. Immediate Impact on Customers
For BlockFi users, the bankruptcy was devastating.
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Withdrawals: BlockFi halted withdrawals on November 10, 2022.
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Custodial Accounts: The company sought court approval to honor withdrawals from custodial wallets.
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Interest Accounts: Customers with interest-bearing accounts faced uncertainty about if, or when, they would be repaid.
While some custodial users eventually received partial access to funds, most creditors had to endure the long and uncertain bankruptcy process.
7. The Crypto Domino Effect
BlockFi’s downfall was part of a broader domino effect in 2022 and 2023:
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Celsius Network: Filed for bankruptcy after liquidity dried up.
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Voyager Digital: Collapsed amid exposure to failing hedge fund Three Arrows Capital.
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Genesis Global Capital: Struggled with solvency after FTX’s implosion.
The common thread was over-leverage, risky lending practices, and lack of safeguards. Each collapse eroded investor trust further.
8. Regulatory Scrutiny
The collapse of BlockFi and FTX forced regulators worldwide to step up oversight.
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In the U.S.: The SEC and CFTC began investigating crypto lenders more aggressively.
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Globally: Central banks and governments debated frameworks to regulate digital assets, focusing on consumer protection.
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Key Issues Raised:
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Lack of deposit insurance in crypto lending.
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Opaque balance sheets and inter-company loans.
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Marketing of high-yield products to retail investors without disclosures.
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Regulators emphasized the need for transparency, safeguards, and risk assessments akin to those in traditional finance.
9. Emerging from Bankruptcy
By October 2023, BlockFi announced it had formally exited bankruptcy, pivoting toward a wind-down plan:
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Assets were to be liquidated.
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Customers were to receive repayments depending on claims.
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Recovery was tied to ongoing litigation against FTX, Alameda, and other debtors.
The process demonstrated the slow and painful nature of bankruptcy in crypto, where customers often wait years for resolution.
10. Investor Lessons from BlockFi
The BlockFi saga offers sobering lessons:
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Counterparty Risk Matters: Relying on interconnected players like FTX or Alameda magnifies vulnerabilities.
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High Yields = High Risk: BlockFi’s double-digit interest rates were unsustainable without extraordinary risk-taking.
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Transparency Is Crucial: Customers often had little understanding of how their deposits were used.
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Crypto ≠ Traditional Banking: Without insurance or reserves, crypto lenders collapse quickly in downturns.
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Diversification is Key: Investors relying solely on one platform risk catastrophic losses.
11. Broader Impact on Crypto Markets
The dual collapse of FTX and BlockFi sent Bitcoin tumbling below $17,000 and dragged altcoins with it. Institutional adoption slowed as trust eroded.
Yet paradoxically, the crises spurred stronger conversations around self-custody, decentralized finance (DeFi), and regulatory frameworks, laying groundwork for a more resilient system in the future.
12. Timeline of Key Events
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2017 – BlockFi founded.
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2021 – Valued at $3 billion.
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June 2022 – FTX provides $400 million credit line.
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Nov 2022 – FTX collapses.
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Nov 28, 2022 – BlockFi files for Chapter 11 bankruptcy.
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Oct 2023 – BlockFi exits bankruptcy with a wind-down plan.
Conclusion
BlockFi’s bankruptcy after the FTX fallout underscores the fragility of poorly regulated financial ecosystems. Once touted as a leader in crypto lending, BlockFi collapsed under the weight of overexposure, poor risk management, and misplaced trust in FTX.
For customers, the collapse was a painful reminder that the promise of high yields often conceals systemic fragility. For regulators, it was a wake-up call to implement stronger oversight. And for the crypto industry, it served as a turning point: transparency, risk controls, and accountability must become foundational pillars if digital assets are to realize their full potential.
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