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BlockFi Files for Bankruptcy in the US, Cites Exposure to FTX Amid Crypto Meltdown

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By Reuters | Updated: 29 November 2022

Cryptocurrency lender BlockFi has filed for Chapter 11 bankruptcy protection, it said on Monday, the latest industry casualty after the firm was hurt by exposure to the spectacular collapse of the FTX exchange earlier this month.

The filing in a New Jersey court comes as crypto prices have plummeted. The price of bitcoin, the most popular digital currency by far, is down more than 70 percent from a 2021 peak.

“BlockFi’s Chapter 11 restructuring underscores significant asset contagion risks associated with the crypto ecosystem,” said Monsur Hussain, senior director at Fitch Ratings.

New Jersey-based BlockFi, founded by fintech executive-turned-crypto entrepreneur Zac Prince, said in a bankruptcy filing that its substantial exposure to FTX created a liquidity crisis. FTX, founded by Sam Bankman-Fried, filed for protection in the United States this month after traders pulled $6 billion (roughly Rs. 49,020) from the platform in three days and rival exchange Binance abandoned a rescue deal.

“Although the debtors’ exposure to FTX is a major cause of this bankruptcy filing, the debtors do not face the myriad issues apparently facing FTX,” said the bankruptcy filing by Mark Renzi, managing director at Berkeley Research Group, the proposed financial advisor for BlockFi. “Quite the opposite.”

BlockFi said the liquidity crisis was due to its exposure to FTX via loans to Alameda, a crypto trading firm affiliated with FTX, as well as cryptocurrencies held on FTX’s platform that became trapped there. BlockFi listed its assets and liabilities as being between $1 billion (roughly Rs. 8,170 crore) and $10 billion (roughly Rs. 81,700 crore).

BlockFi on Monday also sued a holding company for Bankman-Fried, seeking to recover shares in Robinhood Markets Inc pledged as collateral three weeks ago, before BlockFi and FTX filed for bankruptcy protection.

Renzi said BlockFi had sold a portion of its crypto assets earlier in November to fund its bankruptcy. Those sales raised $238.6 million (roughly Rs. in cash, and BlockFi now has $256.5 million (roughly Rs. 2,100 crore) in cash on hand.

In a court filing on Monday, BlockFi listed FTX as its second-largest creditor, with $275 million owed on a loan extended earlier this year. It said it owes money to more than 100,000 creditors. The company also said in a separate filing it plans to lay off two-thirds of its 292 employees.

Under a deal signed with FTX in July BlockFi was to receive a $400 million (Rs. 3,270 crore) revolving credit facility while FTX got an option to buy it for up to $240 million (roughly Rs. 1,960 crore).

BlockFi’s bankruptcy filing also comes after two of BlockFi’s largest competitors, Celsius Network and Voyager Digital, filed for bankruptcy in July, citing extreme market conditions that had led to losses at both companies.

Crypto lenders, the de facto banks of the crypto world, boomed during the pandemic, attracting retail customers with double-digit rates in return for their cryptocurrency deposits.

Crypto lenders are not required to hold capital or liquidity buffers like traditional lenders and some found themselves exposed when a shortage of collateral forced them – and their customers – to shoulder large losses.

BlockFi’s first bankruptcy hearing is scheduled to take place on Tuesday. FTX did not respond to a request for comment.

Creditor list

BlockFi’s largest creditor is Ankura Trust, which represents creditors in stressed situations and is owed $729 million ( roughly Rs. 5,600 crore). Valar Ventures, a Peter Thiel-linked venture capital fund, owns 19 percent of BlockFi equity shares.

BlockFi also listed the U.S. Securities and Exchange Commission as one of its largest creditors, with a $30 million (roughly Rs. 245 crore) claim. In February, a BlockFi subsidiary agreed to pay $100 million (roughly Rs. 820 crore) to the SEC and 32 states to settle charges in connection with a retail crypto lending product the company offered to nearly 600,000 investors.

Bain Capital Ventures and Tiger Global co-led BlockFi’s March 2021 funding round, BlockFi said in a press release issued at the time. Both firms did not immediately respond to a request for comment.

In a blog post, BlockFi said its Chapter 11 cases will enable the company to stabilize its business and maximize value for all stakeholders.

“Acting in the best interest of our clients is our top priority and continues to guide our path forward,” BlockFi said.

In its bankruptcy filing, BlockFi said it had hired Kirkland & Ellis and Haynes & Boone as bankruptcy counsel.

BlockFi had earlier paused withdrawals from its platform.

In a filing, Renzi said Blockfi intends to seek authority to honor client withdrawal requests from its customer wallet accounts, in which crypto assets are held in custody. However, the company did not disclose plans for how it might treat withdrawal requests from its other products, including interest-bearing accounts.

“BlockFi clients may ultimately recover a substantial portion of their investments,” Renzi said in the filing.

Origins

BlockFi was founded in 2017 by Prince, currently the company’s chief executive officer, and Flori Marquez. Though headquartered in Jersey City, BlockFi also has offices in New York, Singapore, Poland and Argentina, according to its website.

In July, Prince had tweeted that “it’s time to stop putting BlockFi in the same bucket / sentence as Voyager and Celsius.”

“Two months ago we looked the ‘same.’ They shut down and have impending losses for their clients,” he said.

According to a profile of BlockFi published earlier this year by Inc, Prince was raised in San Antonio, Texas, and financed his college education at the University of Oklahoma and Texas State University with winnings from online poker tournaments. Before starting BlockFi with Marquez, he held jobs at Orchard Platform, a broker dealer, and at Zibby, a lease-to-own lender now called Katapult.

Marquez previously worked at Bond Street, a small business lending outfit that was folded into Goldman Sachs in 2017, according to Inc.

© Thomson Reuters 2022

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Sam Bankman-Fried’s Bail Guarantors Should be Named, US Judge Rules

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Sam Bankman-Fried's Bail Guarantors Should be Named, US Judge Rules
By Reuters | Updated: 31 January 2023

A US judge on Monday said the names of two people who helped guarantee bail for indicted FTX cryptocurrency exchange founder Sam Bankman-Fried should be made public, but put his ruling on hold pending an expected appeal.

US District Judge Lewis Kaplan in Manhattan ruled in favour of several media outlets including Reuters that sought the names.

The judge said that while the public had only a “weak” right to know who Bankman-Fried’s guarantors were, it outweighed Bankman-Fried’s arguments for confidentiality, including that the guarantors’ safety could be imperilled.

Kaplan also said the names will remain under seal until at least February 7, because “the question presented here is novel and an appeal is likely.” A spokesman for Mark Cohen and Christian Everdell, who represent Bankman-Fried, declined to comment. Bankman-Fried, 30, has been confined at his parents’ home in California, after pleading not guilty to fraud for allegedly looting billions of FTX customer dollars.

His parents, both professors at Stanford Law School, had co-signed a $250 million (roughly Rs. 2,041 crore) bond for their son, with two other guarantors required to sign $500,000 (roughly Rs. 4 crore) and $200,000 (roughly Rs. 1.6 crore) bonds.

Bankman-Fried’s lawyers said the parents had been harassed and received physical threats since FTX’s November collapse and bankruptcy, and there was “serious cause for concern” the additional guarantors might suffer similar treatment.

Kaplan disagreed, noting that long before bail was posted, the parents had faced “intense public scrutiny” over their relationship with their son, who was once worth an estimated $26 billion (roughly Rs. 2 lakh crore).

“The amounts of the individual bonds — $500,000 and $200,000 — do not suggest that the non-parental sureties are persons of great wealth or likely to attract the attention of the types and volume of that to which defendant’s parents appear to have been subjected,” Kaplan wrote.

Media outlets distinguished the case from another judge’s decision not to reveal who guaranteed a bond for Jeffrey Epstein’s longtime associate Ghislaine Maxwell.

They said there was less “stigma” from being associated with Bankman-Fried than from being associated with the late sex offender. Maxwell was later convicted.

Other media seeking to identify Bankman-Fried’s guarantors included the Associated Press, Bloomberg, CNBC, CoinDesk, Dow Jones, the Financial Times, Insider, the New York Times and the Washington Post.

© Thomson Reuters 2023

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FTX Founder Sam Bankman-Fried Objects to Stricter Bail, Says Prosecutors Put Him in ‘Worst Possible Light’

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Bankman-Fried's lawyers were responding to a request by federal prosecutors that the former FTX boss not be allowed to talk with employees.
By Reuters | Updated: 30 January 2023 

Lawyers for Sam Bankman-Fried on Saturday urged a US judge not to ban the indicted FTX cryptocurrency executive from communicating with former colleagues as part of his bail, saying prosecutors “sandbagged” the process to put their client in the “worst possible light.”

The lawyers were responding to a Friday night request by federal prosecutors that Bankman-Fried not be allowed to talk with most employees of FTX or his Alameda Research hedge fund without lawyers present, or use the encrypted messaging apps Signal or Slack and potentially delete messages automatically.

Bankman-Fried, 30, has been free on $250 million (roughly Rs. 2,038 crore) bond since pleading not guilty to charges of fraud in the looting of billions of dollars from the now-bankrupt FTX.

Prosecutors said their request was in response to Bankman-Fried’s recent effort to contact a potential witness against him, the general counsel of an FTX affiliate, and was needed to prevent witness tampering and other obstruction of justice.

But in a letter to US District Judge Lewis Kaplan in Manhattan, Bankman-Fried’s lawyers said prosecutors sprung the “overbroad” bail conditions without revealing that both sides had been discussing bail over the last week.

“Rather than wait for any response from the defense, the government sandbagged the process, filing this letter at 6:00pm on Friday evening,” Bankman-Fried’s lawyers wrote. “The government apparently believes that a one-sided presentation – spun to put our client in the worst possible light – is the best way to get the outcome it seeks.”

Bankman-Fried’s lawyers also said their client’s efforts to contact the general counsel and John Ray, installed as FTX’s chief executive during the bankruptcy, were attempts to offer “assistance” and not to interfere.

A spokesman for US Attorney Damian Williams in Manhattan declined to comment.

Bankman-Fried’s lawyers proposed that their client have access to some colleagues, including his therapist, but not be allowed to talk with Caroline Ellison and Zixiao “Gary” Wang, who have pleaded guilty and are cooperating with prosecutors.

They said a Signal ban isn’t necessary because Bankman-Fried is not using the auto-delete feature, and concern he might is “unfounded.”

The lawyers also asked to remove a bail condition preventing Bankman-Fried from accessing FTX, Alameda or cryptocurrency assets, saying there was “no evidence” he was responsible for earlier alleged unauthorized transactions.

In an order on Saturday, Kaplan gave prosecutors until Monday to address Bankman-Fried’s concerns.

“The court expects all counsel to abstain from pejorative characterizations of the actions and motives of their adversaries,” the judge added.

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India Should Consider Lowering TDS Rate on Cryptocurrency Trade to Stem Flight of Capital, Users: Report

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Many exchanges have been found to exempt TDS rules in their business practice with unauthorised discretion, according to a report.
By Press Trust of India | Updated: 25 January 2023

India should consider lowering the 1 percent TDS on cryptocurrency trade as a high rate is causing a flight of capital and users to platforms in foreign jurisdictions and the grey market, a report said on Tuesday.

The ‘Impact Assessment of 1 percent TDS on VDAs’ report by Chase India and Indus Law said the crypto platforms/exchanges must also perform customer due diligence which can help uncover any potential future risk.

“The existing 1 percent TDS on crypto trade, combined with the absence of comprehensive regulations, is causing a flight of capital and users to platforms in foreign jurisdictions and the grey market,” it said.

The government, from April 1 last year, has brought in a 30 percent income tax plus surcharge and cess on transfer of virtual digital assets (VDAs), including cryptocurrencies, like Bitcoin, Ethereum, Tether and Dogecoin.

Also, to keep a tab on the money trail, a 1 percent TDS has been brought in on payments over Rs. 10,000 towards virtual digital currencies.

“The purpose of the TDS is to establish a trail of crypto transactions, and the same can be achieved by a lower TDS rate. A nominal TDS rate would also support tracking and tracing of transactions, thus aiding in tax collections if Indian investors continued to trade from Indian KYC-enabled platforms,” said the report, which came days before the 2023-24 Union Budget slated on February 1.

It also suggested that for the purpose of safety and oversight, the government must ask all crypto exchanges/platforms to conduct a detailed e-KYC authentication on all investors/traders in line with the Aadhaar rules.

In the joint report, Chase India and Indus Law also said that many exchanges have not been following the said TDS rules despite coming under the legal purview and mandate of conducting business under other Indian laws and regulations.

Many exchanges have been found to exempt this in their business practice with unauthorised discretion. This loophole has thus led to a systemic ‘grey market’ scenario of such exchanges-cum-companies from the fence of taxation, it said.

In its recommendation, the study said: “Every exchange/platform must provide and should be mandated for the submission of transaction records to the tax regulatory authority. This would help the tax authorities (CBDT) create a directory of ‘valid’ exchanges who are following the TDS norm.” The government, in a reply to Parliament, had last month said that it has collected more than Rs 60 crore as TDS for transactions in VDAs.

“In the absence of certain exchanges contributing to the tax clause, the government will miss out on a potential revenue system generated through these trade channels,” the report said.

Chase India spokesperson said: “A Self-Regulatory Organisation (SRO) can be considered to fill the regulatory gaps. It would encourage compliance, protect customer interest, and promote ethical and professional standards amongst the exchanges.” Indus Law spokesperson said, “Stringent TDS provisions are leading to non-tax compliant exchanges being used to avoid tax. Such off the radar transactions may itself be a breeding ground for financial crimes and for other criminal activities.”

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New FTX CEO Says Bankrupt Crypto Exchange Could Restart Business: Report

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FTX's native token FTT surged nearly 30 percent after the disclosure.
By Reuters | Updated: 20 January 2023

Bankrupt crypto exchange FTX is looking into the possibility of reviving its business, Chief Executive Officer John Ray told the Wall Street Journal on Thursday.

Ray, who took over the reins in November, has set up a task force to explore restarting FTX.com, the company’s main international exchange, he said in an interview with the WSJ.

The CEO also told the Journal that he would look into whether reviving FTX’s international exchange would recover more value for the company’s customers than his team could get from simply liquidating assets or selling the platform.

FTX’s native token FTT surged nearly 30 percent after the report.

“I’m glad Mr. Ray is finally paying lip service to turning the exchange back on after months of squashing such efforts!” FTX founder and former CEO Sam Bankman-Fried said in a tweet.

“I’m still waiting for him to finally admit FTX US is solvent and give customers their money back,” Bankman-Fried added.

A legal representative for FTX did not immediately respond to a Reuters request for comment.

Bankman-Fried has been accused of stealing billions of dollars from the exchange’s customers to pay debts incurred by his crypto-focused hedge fund, Alameda Research. He has pleaded not guilty to fraud charges.

The future of customer funds, however, remains unclear. Earlier this week, FTX said in a report to creditors that hackers stole about $415 million (roughly Rs. 3,369 crore) in crypto from its international and US exchanges since its bankruptcy in November.

© Thomson Reuters 2023

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Nothing Outlaws Crypto as Long as You Follow Legal Process, MoS IT Rajeev Chandrasekhar Says

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Reserve Bank of India has been pushing for greater regulation of cryptocurrencies.
By Reuters | Updated: 20 January 2023

Minister of State for Electronics and Information Technology Rajeev Chandrasekhar on Thursday said there was no issue with cryptocurrencies in India if all laws are followed, in remarks that contradicted the Reserve Bank of India’s view advising investors to stay away from crypto.

India has been trying to come up with regulation for cryptocurrencies, with a central bank deputy governor even calling for them to be banned, but the government has not been able to formulate legislation yet.

In the last budget, the government established a taxation framework for cryptocurrencies, while Prime Minister Narendra Modi said at the World Economic Forum last year that a collective global effort was needed to deal with the problems posed by digital currencies.

Junior IT minister Rajeev Chandrasekhar, speaking at an event in the southern city of Bengaluru, said: “There is nothing today that outlaws crypto as long as you follow the legal process.”

In February 2022, a deputy governor of the Reserve Bank of India (RBI), T. Rabi Sankar, said cryptocurrencies were akin to Ponzi schemes or worse and banning them was the most sensible option for India.

RBI Governor Shaktikanta Das also said in February that cryptocurrencies lacked the underlying value of even a tulip.

Last month, Das urged for prohibition of cryptocurrencies, calling crypto trading “a 100 per cent speculative activity.” The RBI Governor warned that the next financial crisis could be triggered by private cryptocurrencies, if such speculative instruments were allowed to grow. “Cryptocurrencies… have huge inherent risks from macroeconomic and financial stability (perspective) and we have been pointing it out,” Das said.

Illicit use of cryptocurrencies reportedly hit a record $20.1 billion (nearly Rs. 1,63,217 crore) last year. According to blockchain analytics firm Chainalysis, transactions associated with sanctioned entities increased more than 100,000-fold in 2022 and made up 44 percent of last year’s illicit activity.

© Thomson Reuters 2023

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FTX Tells US Bankruptcy Court It Has Recovered $5 Billion in Assets After Collapse

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FTX said it was too soon to say how much was needed to compensate customers that saw their deposits vanish overnight.
By Agence France-Presse | Updated: 12 January 2023

Lawyers handling the bankruptcy of FTX, the cryptocurrency giant co-founded by Sam Bankman-Fried, said Wednesday they had recovered $5 billion (roughly Rs. 40,780 crore) in assets in their efforts to salvage funds from the failed firm.

FTX, once the world’s highest profile crypto exchange, collapsed spectacularly in November leaving nine million customers in the lurch and seeing co-founder Bankman-Fried indicted for fraud by US prosecutors.

The downfall of FTX and Bankman-Fried’s arrest and extradition from the Bahamas sent a shockwave through the crypto industry after a decade of extraordinary growth on the back of Bitcoin and other digital currencies.

“We have located over $5 billion of cash, liquid cryptocurrency, and liquid investments securities,” FTX lawyer Andrew Dietderich told a Delaware bankruptcy court.

He also said that the company was “well underway” on plans to sell other investments that had a book value of $4.6 billion (roughly Rs. 37,510 crore).

The lawyer said it was too soon to say how much was needed to compensate customers that saw their deposits vanish overnight.

“We know that all this has led to a shortfall in value to repay customers and creditors. The amount of the shortfall is not yet clear,” Dietderich told the court.

FTX and its sister trading house Alameda Research went bankrupt in November, dissolving a virtual trading business that at one point had been valued by the market at $32 billion (roughly Rs. 2,60,940 crore).

The US has charged Bankman-Fried with conspiracy, wire fraud, money laundering and election finance violations.

FTX’s lawyer told the court the 30-year-old cheated investors by creating a back channel that siphoned away customer deposits at FTX towards Alameda, creating a secret credit line worth $65 billion (roughly Rs. 5,29,990 crore).

Bankman-Fried is out on bail and living at his parent’s home in California after he pleaded not guilty at a Manhattan Federal court on January 3.

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