BlockFi bankruptcy allows return of funds to non-interest-bearing account holders

Bankrupt cryptocurrency lender BlockFi has been granted court permission to return US$297 million to clients holding non-interest-bearing accounts. However, this does not include repayment to customers who made last-minute attempts to transfer funds into those accounts. It was concluded by the UK Bankruptcy Judge that customers owned their deposits in BlockFi’s Wallet programme, a non-interest-paying scheme that maintained customer deposits separately from BlockFi’s general funds. Clients with interest-bearing accounts, though, did not own their deposits, as they were provided to BlockFi to be used in their broader lending ventures.

In 2022, several cryptocurrency lenders went bankrupt, including BlockFi, prompting queries about the ownership of customer funds in similar instances, such as the liquidations of Celsius Network and Voyager Digital. In those cases, judges determined that funds in interest-bearing accounts are considered the property of the bankrupt organisation and are to be amalgamated with other assets before being used to repay all creditors at a later date.

During BlockFi’s collapse, the distinction between the two account types became unclear. On November 10, BlockFi suspended accounts just before declaring bankruptcy without fully deactivating customer-facing functions on their application, which the judge labelled “confusing, misleading and frustrating.” Approximately 48,000 BlockFi customers made attempts to transfer a total of US$375 million from interest-bearing accounts to Wallet accounts during BlockFi’s shutdown. Despite receiving confirmation via their app and email, their lawyers argued that BlockFi should honour the transfers and return the funds.

However, BlockFi never conducted the necessary back-end work to complete the transfers between the two account types, and its terms of service allowed it to halt transfer requests as part of its broader shutdown. The judge stated, “Quite simply, a customer’s withdrawal or transfer request on the user interface did not and does not automatically transfer digital assets.”

In a prior court hearing, BlockFi’s attorney, Michael Slade, argued that allowing the US$375 million in transfers would substantially dilute the recovery for Wallet account holders and potentially prevent BlockFi from returning any customer funds. This is due to the practical difficulties of determining how to pay the added Wallet claims from a fixed asset pool.

BlockFi filed for Chapter 11 protection in November, attributing their decision to the volatile nature of crypto markets and their exposure to the cryptocurrency exchange FTX which faced its own collapse amid revelations of missing customer funds, reports Channel News Asia.