BlockFi denies repayment entitlement to FTX and 3AC

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Key takeaways:

  • BlockFi claims it is not responsible for FTX and 3AC’s fraud and thus refuses to refund them.
  • The hedge fund contends that BlockFi’s efforts to minimise its claims may violate the bankruptcy protection granted for Chapter 15 protection.

In its ongoing legal battle, struggling cryptocurrency lender BlockFi is aiming to thwart attempts by FTX and Three Arrows Capital (3AC) to reclaim billions of dollars exchanged before their collapse last year.

BlockFi alleges that it was ensnared by the actions of former FTX CEO Sam Bankman-Fried’s enterprise, according to recently submitted court documents. The accusation suggests that FTX, along with sister trading firm Alameda Research, wrongfully diverted customer funds in an intricate scheme intended to deceive investors.

 In a recent court filing, BlockFi vehemently stated that it should not be held accountable for FTX’s actions involving creditors’ funds. This assertion places the blame for fraudulent behavior on FTX, relieving BlockFi’s estate of any obligation to make reparations.

According to BlockFi’s clients and creditors, FTX is attempting to recover a claimed $5 billion from BlockFi’s assets, ultimately burdening those who suffered from FTX’s own deceitful conduct.

In order to prevent further injustice to BlockFi’s creditors, the Court should reject the FTX Claims based on the principle of ‘unclean hands‘,” stated BlockFi in the filed documents.

FTX extended an additional $400 million to BlockFi in June 2022 and also acquired BlockFi equity through a loan agreement, as outlined in the filing.

Nevertheless, BlockFi contends that this was not a typical loan arrangement; instead, it was an unsecured, 5-year term with interest rates significantly below the market norm, and repayments were deferred until BlockFi’s supposed maturation.

BlockFi characterizes FTX’s investment as a “speculative endeavor” that should not impose liability on BlockFi’s creditors.

FTX attempted to rectify the situation by providing $400 million to BlockFi in June 2022, apart from securing equity through the loan agreement.

BlockFi emphasizes that just because FTX’s deceptive actions resulted in the failure of their investment doesn’t mean that BlockFi’s creditors are now obligated to reimburse the investment amount.

The sum in question, $5 billion, pertains to the funds lent to FTX, which BlockFi claims were acquired under fraudulent pretenses.

Similarly, BlockFi argues that Three Arrows Capital should not be entitled to repayment, alleging that the crypto hedge fund engaged in fraudulent tactics to secure the funds in question. Last year, 3AC had borrowed loans from BlockFi, which subsequently defaulted. 

This led to the seizure of collateral and what 3AC’s liquidators termed a $220 million “preferential payment to BlockFi.”

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Aadrika Sharma
Aadrika Sharma

I enjoy writing and try to learn new things every passing day!

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