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Bermuda-linked company caught up in turmoil of FTX collapse

Into the digital future: a slew of investigations are underway after a dramatic collapse of crypto trading platform FTX Trading Ltd (AP Photo/Jenny Kane, File)

The parent of a Bermuda-based fintech company has stopped permitting customer withdrawals and had its California lending licence suspended in the wake of the spectacular collapse of crypto trading platform FTX Trading Ltd.

On Thursday, BlockFi, which was set up as a digital asset lender and was rescued by FTX earlier this year, said it was pausing withdrawals.

This weekend, BlockFi said: “We are shocked and dismayed, by the news regarding FTX, and Alameda. We, like the rest of the world, found out about the situation through Twitter.

“Given the lack of clarity on the status of FTX.com, FTX US and Alameda, we are not able to operate business as usual. Our priority has been, and will continue to be, to protect our clients and their interests.

“Until there is further clarity, we are limiting platform activity, including pausing client withdrawals as allowed under our terms. We will share more specifics as soon as possible. We request the clients not deposit to BlockFi wallet or interest accounts at this time.

“We intend to communicate as frequently as possible going forward but anticipate that this will be less frequent than what our clients and other stakeholders are used to.”

The pause, and a subsequent suspension of its lending licence by California regulators, came after distressed crypto trading platform FTX Trading Ltd collapsed into bankruptcy last week.

Reuters news agency reported that as much as $2 billion of client funds could be missing.

The US Securities and Exchange Commission, the Department of Justice and the Commodity Futures Trading Commission have all launched investigations involving FTX and founder Sam Bankman-Fried, who stepped down as chief executive, amid the controversy.

Investigations are centring on the company’s handling of customer funds as well as its crypto-lending activities.

The world’s second largest cryptocurrency exchange, FTX sent shock waves through the crypto world by filing for bankruptcy protection.

It filed a petition for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the District of Delaware.

But the company reported $10 billion to $50 billion in both assets and liabilities and sought to place about 130 affiliates, including its crypto trading firm Alameda Research, into bankruptcy.

New Jersey-headquartered BlockFi is the parent company of BlockFi International Limited, the Class F digital assets business licence holder in Bermuda.

With this licence, BlockFi said, it would centralise its existing products and services for non-US retail and institutional clients under a comprehensive and clear regulatory framework for cryptocurrency financial service providers.

Zac Prince, chief executive and co-founder of the company, said in August that it was in the process of seeking Bermuda employees for the office.

After Blockfi announced it was pausing withdrawals, the California Department of Financial Protection and Innovation said it had “issued a notice to suspend BlockFi Lending LLC’s California Financing Law lender licence for 30 days pending the department’s investigation into BlockFi’s recent announcement to limit its platform activity including pausing client withdrawals”.

It said it was investigating BlockFi’s compliance with the laws within the commissioner’s jurisdiction, including the California Financing Law.

The department said: “BlockFi reports to the DFPI that it has ceased offering loans in California and asks clients not to deposit to the BlockFi Wallet or its interest accounts.”

It added: “The DFPI takes its oversight responsibility very seriously. We expect any person offering securities, lender, or other financial services provider that operates in California to comply with our financial laws.”

The DFPI is the agency responsible for administering the state’s lending and banking laws, the recent California Consumer Financial Protection Law and the state’s securities laws, which govern broker dealers, investment advisers, and commodities.

BlockFi was substantially impaired by this year’s crypto crash and was bailed out by FTX before the latter also became financially troubled.

Bloomberg reported that the FTX US earlier in the year offered BlockFi a major lifeline by providing a $400 million revolving credit facility in an agreement that came with the option to purchase the company.

BlockFi was originally valued at $3 billion in March 2021 and sought to raise money at a reduced valuation of about $1 billion in June. The firm also faced scrutiny from financial regulators over its interest account and paid $100 million in penalties to the SEC.

BlockFi took an $80 million hit from the bad debt of crypto hedge fund Three Arrows Capital, which imploded after the TerraUSD stablecoin wipeout in May.

Authorities in the Bahamas, where FTX.com is based, froze the assets of its local trading subsidiary and “related parties”, further signs that founder Bankman-Fried’s empire was teetering.

Earlier last week, Binance, another company with Bermuda connections, crept away from a deal to bail out FTX after only one day of due diligence.

Binance, the self-described world’s biggest bitcoin exchange and alt-coin crypto exchange, once proposed creating 40 jobs in Bermuda and investing millions of dollars here before establishing an exchange in Malta.

Earlier in the week, as Binance was called in to help, officials in the Bahamas were trying to assess the reputational threat to the jurisdiction.

Bahamas prime minister Philip Davis earlier this year hailed the FTX arrival as proof that his country was on the verge of becoming a home for crypto’s global leaders.

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Published November 14, 2022 at 7:53 am (Updated November 15, 2022 at 7:53 am)

Bermuda-linked company caught up in turmoil of FTX collapse

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