Bankrupt crypto lender BlockFi won court permission on Thursday to return $297 million (about 2,439 crore) to customers with interest-free accounts without repaying customers who made last-minute attempts to transfer funds to those accounts.
U.S. Bankruptcy Judge Michael Kaplan in Trenton, New Jersey, ruled that customers own their funds in BlockFi’s wallet program, which pays no interest and keeps customer funds separate from BlockFi’s other funds. Kaplan ruled that customers with interest-bearing accounts did not own their deposits, which were turned over to BlockFi for use in its broader lending business.
BlockFi was one of several crypto lenders to go bankrupt in 2022, and the Celsius Network and Voyager Digital bankruptcies also raised questions about the ownership of customer funds. The judges have ruled in these cases that the funds in interest-bearing accounts are owned by an insolvent company, pooled with other assets and used to repay all creditors at a later date.
The disconnect between the two account types at BlockFi disappeared when BlockFi froze accounts shortly before filing for bankruptcy on November 10 without completely disabling its app’s customer-facing features, resulting in a situation that Kaplan described as “confusing, misleading, and frustrating.” designated.
Approximately 48,000 BlockFi customers attempted to transfer $375 million (approximately 3,080 crore rupees) from interest-bearing accounts to wallet accounts during BlockFi’s shutdown on November 10, and they received an in-app and email Confirmation that the transfers were completed. The lawyers for these customers argued that BlockFi should honor the transfers and return the funds to these customers as well.
But BlockFi never did the back-end work needed to complete transfers between the two account types, and its terms of service allowed it to block transfer requests as part of its broader shutdown, Kaplan ruled.
“Quite simply, a customer’s withdrawal or transfer request in the user interface did not and does not automatically result in an automatic transfer of digital assets,” Kaplan said.
BlockFi attorney Michael Slade had argued in a previous court hearing that approving the $375 million (approximately Rs.3,080 crore rupees) transfers will significantly dilute recovery for wallet customers and potentially prevent BlockFi from doing so due to the practical difficulty of sorting would return customer funds Find out how to settle the additional wallet claims from a fixed pool of assets.
BlockFi filed for Chapter 11 protection in November, citing volatility in crypto markets and its exposure to crypto exchange FTX, which imploded on revelations that customer funds were missing from the exchange.
© Thomson Reuters 2023
