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BlockFi Custodial Customers to Receive $300M in Repayment, While BIA Holders Risk Losing Investment to Company’s Creditors

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A judge agreed to pay the owners of BlockFi’s custodial wallets but said the interest-bearing funds still belonged to the bankrupt company.

BlockFi custodian wallet users could get a whopping $300 million in repayment from a bankrupt digital asset lender. On Thursday, a New Jersey judge ruled that assets locked in BlockFi custodial accounts belong to customers, not the company’s property. However, the judge further ruled that another $375 million that users sought to transfer from interest-bearing accounts after suspending withdrawal in November still belonged to BlockFi.

as Judge Michael Kaplan Put He. She:

“The court found that all digital assets held by debtors in custodian wallets are in fact the property of the client and not the property of the bankruptcy estate, and are of course subject to revocation and restitution rights.”

Meanwhile, Judge Kaplan’s Least Welcoming Speech to BlockFi (BIA) Holders is reading:

“No transfer requests were executed and completed by clients between BIA Accounts and Depositary Wallet Accounts after 8.15pm on 10th November 2022. BIA account holders deposited their assets into these accounts knowing full well that they were taking certain risks in return for the chance of greater returns.”

BlockFi bankruptcy case details

Kaplan stressed his BIA ruling even though BlockFi’s user front-end appears to confirm successful transfer of funds to customers. The bankruptcy judge absolved holders of custodian portfolios from the same fate as BIA clients because they (the custodians) “did not share that risk or return.” As a result, the custodial property of non-real property should not be diluted by “those who have taken such risks”.

Bankruptcy laws support the immediate return of funds owned by clients rather than dividing said funds among the creditors of the company’s property. In the case of BlockFi, the custody payment was delayed due to a dispute over funds held in the company’s interest-bearing accounts. Customers attempted to liquidate these funds after November 10 after withdrawals and transfers were suspended. BlockFi’s BIA holders also experienced another diversion on November 18 when the cryptocurrency lender made corresponding changes to the application.

In early November, BlockFi froze funds in its interest-bearing accounts as FTX meltdowns permeated the cryptocurrency ecosystem. The New Jersey-based digital asset lender finally filed for Chapter 11 bankruptcy on November 28 — just weeks after the collapse of FTX.

BIA’s client attorney argues for the same favorable reimbursement treatment for clients as custodian wallet holders

Meanwhile, prior to BIA’s current bankruptcy court ruling, an attorney representing the aggrieved clients refused to look at the optics of reimbursement.

In a hearing Monday, Deborah Kofsky-Abb of Trotman Paper argued for BIA clients to be included in any payment plans. Kovsky-Apap noted that its agents all attempted to transfer BIA property during the transition period between November 10 and 18. The lawyer said it would be unfair to ignore the “clear language of the terms of service” that promise instant transactions. Additionally, Kovsky-Apap suggested that BlockFi was discriminatory in its treatment of customers who all faced the same situation.

Michael P. Slade, BlockFi’s attorney and case representative, said the company had not completed sales of its assets in other developments. Slade’s disclosure came amid reports that some customers had received email confirmations of sales of said assets.

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Tolu is a cryptocurrency and blockchain enthusiast based in Lagos. He likes to demystify cryptocurrency stories down to the bare essentials so that anyone anywhere can understand without much background knowledge. When not in the depths of cryptocurrency stories, Tolo enjoys music, loves to sing, and is a movie lover.

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