According to a Reuters report on May 11, a U.S. bankruptcy judge has granted permission for crypto lender BlockFi to refund $297 million to customers who held deposits in its Wallet program. However, this refund does not apply to users of BlockFi Interest Accounts (BIA). Judge Michael Kaplan ruled that funds in BIA accounts were used by BlockFi for its lending activities and are therefore part of the bankruptcy estates, to be utilized for repaying all creditors.
The Wallet program, on the other hand, did not offer interest on customer deposits and was kept separate from other funds. Users who attempted to transfer funds from BIA accounts to Wallet accounts will not receive a refund at this time, as per the judge’s ruling. Following the collapse of FTX, approximately 48,000 BlockFi clients tried to transfer $375 million from their BIA accounts to Wallet accounts on November 11. During this period, BlockFi had frozen its services.
Despite BlockFi not disabling transfer options on its front-end application, transactions between accounts were ultimately disabled on the back-end, preventing their completion. Customers’ lawyers argued that BlockFi should refund these failed transfers as well. However, Judge Kaplan stated that BlockFi was within its rights, based on its terms of service, to block transaction requests during the service freeze.
BlockFi filed for Chapter 11 bankruptcy protection in late November after facing speculation about its financial stability following the FTX incident. At the time, the crypto lender had $256.9 million in liquidity. Court documents revealed that West Realm Shires Services Inc. (operating as FTX US) topped the list of creditors, along with a $30 million debt owed to the U.S. Securities and Exchange Commission.
To repay its creditors, BlockFi aimed to sell its crypto mining equipment and $160 million in Bitcoin-backed loans. The company owes an estimated $10 billion to over 100,000 creditors. BlockFi is required to submit its bankruptcy exit plan by May 15. Its lawyer, Joshua Sussberg, mentioned that the company is exploring options such as selling its assets or finding an external backer to support a restructuring agreement.