BlockFi Bankruptcy And What Crypto Investors Should Know

In late November 2022, the crypto firm BlockFi’s bankruptcy filing was announced widely, and a report from CNBC identified the bankruptcy as “the latest cryptocurrency domino to fall after the collapse of FTX . . . threatened to destabilize companies in the broader crypto ecosystem.” More than 100,000 investors, or creditors, are likely to be impacted by the BlockFi bankruptcy filing. Our West Palm Beach bankruptcy lawyers want to tell you more about the bankruptcy and discussions concerning investor protections.

BlockFi Chapter 11 Bankruptcy Filing 

BlockFi is a cryptocurrency exchange, and it filed for Chapter 11 bankruptcy on November 28, 2022. At the time of the bankruptcy filing, BlockFi disclosed that it had more than 100,000 creditors, including a client with a “balance of $28 million,” according to an article in Forbes. These numbers are actually not as staggering as those reported by other cryptocurrency exchanges that have recently filed for bankruptcy.

When a cryptocurrency exchange like BlockFi files for bankruptcy, the automatic stay prevents creditors, or customers, from being able to recover their money. Given that digital assets like cryptocurrency are relatively new, there is limited regulation, and it is not clear whether customers have any protections under federal law. One potential route for protection involves federal securities laws.

Potential Protections for Creditors

The potential protections for those creditors may depend on the application of a decades-old U.S. Supreme Court case, SEC v. W.J. Howey Co. (1946). Why would this case be applicable to possible protections for investors when a firm like BlockFi files for bankruptcy? As the CNBC report explains, “cryptocurrencies such as bitcoin, ethereum, and others in the digital-asset realm exist in a gray area of federal regulation,” which “means they largely escape the same oversight as holdings such as stocks and bonds.” In addition, “federal money is not available to backstop customers in the same way it would be for those with holdings at a failed brokerage firm or bank.” Yet if investors can prove that digital assets like cryptocurrency constitute an “investment contract” under Howey, investors could have more protections than it appears that they currently have.

The Howey decision gave rise to the “Howey test,” which is a test used to determine whether an “investment contract” exists. If there is an investment contract, then federal securities laws apply, and investors could have those protections. Indeed, as the CNBC report explains, the “SEC would be able to police companies not complying with securities laws.” At the same time, many commentators suggest that the Howey test is not the correct way to think about cryptocurrency and how investors can be protected in the event of a bankruptcy like the recent BlockFi bankruptcy.

Contact a West Palm Beach Bankruptcy Attorney 

Until there is a determination about whether cryptocurrency assets are governed by securities laws, many investors (i.e., creditors or customers of BlockFi and others) do not have any clear recourse for recovering what they owe. If you have concerns about the BlockFi bankruptcy or another crypto exchange bankruptcy, you should seek advice from a West Palm Beach bankruptcy lawyer at Kelley Kaplan & Eller about your options.

Sources:

cnbc.com/2022/11/28/what-to-know-about-crypto-investor-protections-as-blockfi-files-for-bankruptcy.html

sec.gov/corpfin/framework-investment-contract-analysis-digital-assets

forbes.com/advisor/investing/cryptocurrency/blockfi-bankruptcy/