The collapse of FTX and the bankruptcy of BlockFi has caused a ripple effect in the crypto industry, leaving investors with limited options to safeguard their investments.
The cryptocurrency market has been through a rough patch over the past year, with the bankruptcy of several major players causing concern among investors. One of the latest casualties is BlockFi, a cryptocurrency exchange that filed for Chapter 11 bankruptcy in November 2022 after being hit by the ripple effect of FTX's collapse earlier in the month.
This article examines the fallout from these events and what they mean for the future of the cryptocurrency industry.
The FTX Fallout
When FTX, one of the largest cryptocurrency exchanges in the world, filed for bankruptcy in November 2022 due to an $8 billion deficit, the industry felt the impact. BlockFi, promised a rescue by former FTX CEO Sam Bankman-Fried during a liquidity crisis in June, found that the "life raft" swiftly deflated when FTX went down.
BlockFi's bankruptcy filing revealed substantial exposure to FTX and its sibling company, Alameda Research. BlockFi had taken a financing package from FTX earlier in the year, worth up to $400 million, to assist it in weathering a liquidity constraint caused by its exposure to the collapse of the TerraUSD stablecoin. However, the Terra failure caused a loss of almost $500 billion in market value across all crypto marketplaces.
BlockFi's bankruptcy filing also showed that it had over 100,000 creditors, with the largest customer having a $28 million balance. While these figures are substantial, they pale compared to the $3.1 billion FTX owes its top 50 creditors, including BlockFi.
The Lack of Investor Protection
The safeguards available to cryptocurrency investors are distinct from those found in more conventional financial markets. There will be no government bailouts like there were when banks around the world failed during the Great Recession. Customers of conventional financial institutions like banks, brokerages, and 401(k) plans have the security of federal insurance. When it comes to crypto assets, however, neither the FDIC nor the Securities Investor Protection Corporation (SIPC) offers any form of insurance.
Bankman-Fried and FTX stepped in as the lender of last resort earlier this year because of a lack of investor protection. The lack of finalized legislation in the sector is a major source of unpredictability. Legislators and federal regulators are still working out how crypto assets should be controlled, and it's unclear whether authorities consider crypto assets to be securities.
Many demands that authorities speed up their business coverage because of the widespread lack of transparency and the exposed position of many consumers caused by the collapse of all these collapsing organizations.
What Happens to Users Now?
The bankruptcy of BlockFi and other cryptocurrency exchanges has left investors with few options. The safeguards available in more conventional financial markets do not exist in the crypto world, exposing investors to the risk of losing their assets without recourse.
Before declaring bankruptcy, several lenders, including Celsius and Voyager Digital, began freezing customer withdrawals. Now, consumers of BlockFi have found themselves in a similar predicament as those of the aforementioned sites, and the legal processes are expected to go on for years.
BlockFi has asked its clients not to add more money to their accounts. However, given the lack of investor protection, it's unclear whether investors will return to the cryptocurrency market.
The collapse of BlockFi and other cryptocurrency exchanges has led to calls for increased industry regulation. However, regulators have been slow to act, leaving investors in a precarious position.
There are proposals for cryptographic signatures and proof of custody over wallets to ensure that all assets and obligations are accounted for. However, detractors stress the need to include liabilities with reserve evidence.
What can BlockFi Customers Do?
As many BlockFi customers are left concerned about the safety of their assets in the wake of FTX's fall, there are steps they can take to ensure their investments are protected. Below are some subheadings to discuss what BlockFi customers can do.
Contact the Claims Agent
If you are a BlockFi client and would like further information about your assets, it's recommended that you contact the claims agent appointed to handle claims from the company's creditors in the event of bankruptcy. By doing so, you can obtain information about the status of your investments and what steps you can take to protect them.
Keep Track of Your Assets
BlockFi's platform allows customers to keep track of their assets and their current market value. It's important to monitor your investments regularly, especially during times of uncertainty, and compare the data with your records to ensure the information is accurate. This can help you identify any discrepancies and take appropriate action.
Stay Informed about the Company's Status
Staying informed about BlockFi's status is crucial, particularly during financial instability. BlockFi released a message on its website assuring customers that the company will make good on its debts and that reorganization is the usual goal of Chapter 11 bankruptcy. Customers can make informed decisions about their investments by keeping updated with the latest news.
Initiate Your Claim
If you believe your investments have been affected by BlockFi's financial situation, it's important to take action and initiate your claim. By doing so, you can protect your investments and ensure that you have the best chance of recovering any losses.
BlockFi customers have options available to them during this time of financial uncertainty. By contacting the claims agent, keeping track of their assets, staying informed about the company's status, and initiating their claim, customers can take steps to protect their investments and minimize their losses.
What is Next after FTX Financial Crisis
The fallout from the FTX financial crisis has highlighted several weaknesses in the crypto industry, particularly with centralized exchanges that facilitate the buying and selling cryptocurrencies. As a result, customers of BlockFi and other similar third-party services may be uncertain about the safety of their assets.
It may take some time for clients to learn how much they may recoup during a bankruptcy case. In the meantime, customers should evaluate their decision to store cryptocurrency on a third-party service like BlockFi or FTX. These businesses do not offer the same safeguards against consumer losses as traditional financial institutions like banks and brokerage firms.
While using a centralized service with your coin has various benefits, your crypto assets are at risk if the exchange where they are stored suddenly shuts down. Several cryptocurrency exchanges have begun disclosing more information on their reserves to protect customer funds. Customers can use this information to decide where to acquire or keep their cryptocurrency.
Customers can also consider obtaining a crypto wallet to store their assets securely. However, wallets have drawbacks, and losing your password can make it difficult to access your cryptocurrency. Therefore, it is essential to be diligent and take appropriate measures to protect your cryptocurrency assets.
The bankruptcy of BlockFi due to the ripple effect of FTX's collapse has highlighted the lack of investor protection in the cryptocurrency market. This has left investors with few options and uncertain about the future of their investments. The collapse of BlockFi and other cryptocurrency exchanges has led to calls for increased industry regulation, but regulators have been slow to act.
For BlockFi customers, there are steps they can take to protect their investments, including contacting the claims agent, keeping track of their assets, staying informed about the company's status, and initiating their claims.
After the collapse of FTX, investors are now turning their attention to Proof of Reserves, which is believed to be able to maintain the security of client deposits by employing third parties in auditing.