BlockFi, a company that offers crypto-backed loans, has filed for Chapter 11 bankruptcy. The company blames the bear market in cryptocurrency, which led to fewer people taking out loans and paying them back on time.
BlockFi is not the first crypto loan provider to file for bankruptcy in 2019. In January, the peer-to-peer lending platform Salt Lending closed its doors after filing for Chapter 7 liquidation in November 2018 due to “slowing business activity and lack of capital.”
Similarly, in February, Bitbond sought legal protection in a German insolvency process that allows companies to continue operating for the sake of customers. This news came shortly after the company reportedly shut down its lending service.
Borrowers and investors also have reason to be concerned about the safety of their money. In January, crypto lending platform ETHLend called it quits after allegedly losing $3 million to a hacker. It is unclear whether any investors or borrowers were affected by this breach.
Other digital currency lending platforms like BTCJam and Bitbond have also shut down or stopped lending in 2019.
BlockFi offers loans through a peer-to-peer model. It accepts cryptocurrency as collateral, offering borrowers access to loans to purchase digital assets with their cryptocurrencies as collateral. The US arm of the company initially launched in May 2018, and it quickly garnered attention from investors after it announced that it had secured $25 million in funding earlier this year.
In its complaint filed on 27 February 2019, BlockFi claims that despite accumulating $83 million in loans for more than 30,000 investors in 2018, the company still does not have enough capital to continue maintaining its business.
How BlockFi works
BlockFi’s platform works like a large peer-to-peer lending service. It accepts borrowers who want to turn their Bitcoin, Ether and other cryptocurrencies into cash. The company offers loans worth between $1,000 and $10,000 with fixed rates of interest from 5% to 10%. However, the interest rate is lower for borrowers who lend more than $10,000 at an interest rate of 3% to 10%.
The company also allows users to pay back loans in monthly installments or one lump sum through either traditional payment methods like bank transfers or cryptocurrency payments. It also offers cryptocurrency conversion services to facilitate the payment process.
If your loan payment is more than a month late, BlockFi will initiate legal action against the borrower to recover the debt in court. This means that if someone defaults on their loan, BlockFi would have access to the borrower’s legal documents and financial history. These documents are personal information, which may violate US privacy laws.
BlockFi has not filed for bankruptcy due to this or other reasons yet—but it does not seem like it will be able to pay back its customers in a timely manner. However, in order for this claim against borrowers to hold up in court, BlockFi would have a better case if it could show that some of its investors suffered as a result of this failure.
What could the bankruptcy mean for BlockFi?
Bankruptcy law applies to companies like BlockFi that operate in the United States. If the US bankruptcy court ultimately approves it, BlockFi can either be forced out of business or continue to operate as a private company. This would likely allow investors to recover their loss, but it is unclear if a bankruptcy court would grant talks for consumers who have been wronged by the company.
Whatever happens, it will probably be some time before we know what effect Bitcoin and cryptocurrency regulation has on its users. While the US government may work to regulate digital currencies, some countries have taken a more accommodating approach in regard to crypto lending and borrowing.
BlockFi is not the only case of a Bitcoin-backed lending service filing for bankruptcy. In December 2018, the cryptocurrency firm Bitfinex also filed for Chapter 7 bankruptcy. The company claimed it would remain operational in Hong Kong after its American subsidiary folded.
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