A United States judge has granted permission to bankrupt crypto lender BlockFi to return $297 million to customers with deposits held in its Wallet program, Reuters reported on May 11.
The return of funds does not apply to users of BlockFi Interest Accounts (BIA). According to Bankruptcy Judge Michael Kaplan, funds in BIA accounts were used by BlockFi for its lending business and therefore are property of the bankruptcy estates. This means the funds will be later used to repay all creditors.
The Wallet program, in contrast, did not pay interest on customer deposits and was kept separate from other funds.
BIA users who attempted to transfer funds to wallets will not get a refund at this time, the judge also ruled. Nearly 48,000 BlockFi clients tried to transfer $375 million from their BIA accounts to Wallet accounts on Nov. 11, after the company froze services following the collapse of FTX.
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BlockFi, however, did not disable transfer options from its front-end application, allowing users to make transactions between accounts and even receive email confirmations. Those transactions were disabled on BlockFi's back-end, though, meaning they could not be completed.
Lawyers for those customers argued that BlockFi should refund their transfers as well. Judge Kaplan said that, according to BlockFi's terms of service, the lender was entitled to block transaction requests during the shutdown.
BlockFi filed for Chapter 11 bankruptcy protection in late November, following days of speculation about its financial health after the FTX debacle. At that time, the crypto lender had $256.9 million in liquidity. Court documents showed West Realm Shires Services Inc. (doing business as FTX US) at the top of the creditors' list, along with a $30 million debt with the U.S. Securities and Exchange Commission.
The company sought to sell its crypto mining equipment and $160 million in Bitcoin-backed (BTC) loans to repay its creditors. BlockFi owes over 100,000 creditors an estimated $10 billion.
BlockFi should submit its bankruptcy exit plan by May 15. According to its lawyer, Joshua Sussberg, BlockFi is exploring a potential sale of its assets or the possibility of finding an outside backer to support a restructuring deal.
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