SEC Blamed for BlockFi Collapse But Likely to be Paid First

The BlockFi days are over. Markets have long been wary of BlockFi’s close relationship with FTX, and have largely anticipated the exchange’s collapse following FTX’s.

On Tuesday, attorney Joshua Sussberg told a US bankruptcy court that BlockFi has a whopping US$355 million in cryptocurrencies currently frozen on FTX.

The figure is in addition to the US$671 million loan from FTX sister company Alameda Research, which defaulted on the loan.

But the final nail in BlockFi’s coffin was supposedly the SEC. Ripple general counsel Stuart Alderoty points towards the US commission agency and its enforced penalty.

Read more: Crypto Lender BlockFi Declares Chapter 11 Bankruptcy

“Another SEC “regulation by enforcement” success story. Months after $100M BlockFi/SEC deal BlockFi in b/cy. $275M loan outstanding to FTX from BlockFi. Unknown amounts owed to BlockFi from FTX. Nothing ever registered. Fines paid? With whose money? Consumers decimatedm,” Alderoty tweeted.

US regulators including the SEC took legal action against BlockFi for offering unregistered securities and returning customers high interest rates to lend out their tokens. BlockFi was lumbered with a $100m fine, which ultimately led them to turn to FTX for help.

Alderoty questioned whether the fine had even been properly registered or whether the SEC evaluated BlockFi’s ability to pay the fine. He also claimed FTX’s bankruptcy revealed a US$250 million loan to BlockFi which was used to finance the fine.

“Despite BlockFi ending up intertwined with FTX and customers left holding the bag, the SEC still markets the BlockFi deal as another ‘win’ for regulation by enforcement,” Alderoty said. “Oh, what a tangled web…”

SEC takes it all

To add salt to the wound, the SEC is most likely to be paid first in BlockFi’s bankruptcy proceedings whilst retail customers are unlikely to see any of their funds.

The claim comes from Hodder Law founder Sasha Hodder, who said the regulator is the first mover and the first “in line, in front of retail creditors.”

“The customers are really at the bottom of the list here,” Hodder said.

BlockFi has US$257 million cash on hand and owes the SEC US$30 million. The crypto lender had reached a US$50 million settlement with the SEC and agreed to pay another US$50 million to other states that also filed charges, leaving US$30 million still unpaid.

Read more: Can DCG Escape A Potential Creditor Siege?

Hodder warns that the SEC fine sends a stern message to the wider crypto industry.

“What the SEC is trying to say is that all of this lending activity should be considered a debt security,” Hodder said. “And if it was a security, then it would have to be held on a platform that met certain regulatory standards.”

Hodder further critiques the SEC. “If the SEC had regulated harder against these companies,” the fallouts could have been prevented Hodder said.

“You’d think a $100 million fine would be a strong signal, but it didn’t stop the other companies that were already engaged in this activity from continuing on for another few months,” she said.