Disney veteran Bob Iger became a boomerang CEO last week, two years after he retired from the company. After flirting with a bankruptcy filing earlier this year, crypto lending form BlockFi has also boomeranged right back to towards it.

The lending firm filed for Chapter 11 bankruptcy in its home state and Bahamas yesterday. The filing was expected since it had documented exposure to FTX, which “rescued” it with a $400 million revolving credit facility this past June.

But the company’s relationship with its former savior has become complicated.

BlockFi owes $30 million to FTX and has also sued the exchange’s former CEO Sam Bankman-Fried’s (SBF) investment firm. In addition to owing money to the exchange, BlockFi was also promised collateral, in the form of shares of Robinhood – the stock trading app in which SBF bought a stake earlier this year, for a loan from Alameda Research, the trading firm for FTX. But SBF was also trying to raise money to save his troubled exchange by selling those shares at the same time.

A Victim of FTX Exposure

As with all companies in crypto, BlockFi is many things at the same time. It claimed to be a market maker for Grayscale and a crypto lending firm. The crypto winter, and its accompanying double-digit price declines, has affected operations at many crypto firms.

But BlockFi says that it tipped over into bankruptcy due to its exposure to FTX. Since we don’t have a window into its balance sheet, there is not much room to disagree. Previously, the firm offered unsustainable interest rates to attract customers to its lending products and was fined by the Securities and Exchange Commission (SEC) for offering unregistered products. In fact, according to yesterday’s filings, BlockFi still owes $30 million to the agency.

The document also puts the number of BlockFi creditors at more than 100,000. But the number of retail customers affected by BlockFi’s bankruptcy is not clear. Considering the crypto habit of passing money among limited players, the company not have many retail creditors.

The company said it $257 million in cash in its coffers. Its biggest creditor is Ankura Trust, trustee for its customer assets, which is owed $729 million. The company claims it has assets and liabilities between $1 billion to $10 billion. CEO Zac Prince had said earlier that the company had $80 million in losses due to its exposure to Three Arrows Capital – the defunct hedge fund that was among the earliest crypto casualties this year.

A Chapter 11 Bankruptcy

Will BlockFi be buried in the graveyard of failed crypto ventures? The chances are unlikely.

One of the interesting things about the filings made by FTX and BlockFi is that they are Chapter 11 bankruptcies. Such bankruptcies are reorganization bankruptcies made by companies that anticipate a return to corporate existence. Depending on the state of their finances, some companies are allowed to continue operating even as they reorganize their credit and pay off debts.

The determining factor here is the size and complexity of debt. FTX’s complicated structure – it has 102 subsidiaries and associated entities – and the scale of its losses and operations means that it might take a while before the exchange resumes normal operations if it ever does. Its CEO has said that the company is looking to sell or restructure its “global empire.”

BlockFi’s Reorganization  

BlockFi is on firmer ground. Its stated cash reserves will enable it to continue operations, albeit on a reduced scale. Its regulatory engagement has also helped it avoid the negative press generated by the FTX fiasco.

“To date, I have not found any failure of corporate controls or systems integrity, and I have found BlockFi’s financial information to be trustworthy,” the company’s advisor Martin Renzi stated.

Indeed, on its website, BlockFi states that the Chapter 11 cases enable the company “to stabilize the business” and provide it with the opportunity to “consummate a reorganization plan.” According to reports, the company has already begun sounding out its workforce about coming layoffs.

Whether those layoffs are a result of unsustainable growth during the pandemic, when it added hundreds of employees to aid unsustainable growth, is open to question. In a June blogpost announcing layoffs for 20 percent of its 850-strong workforce, CEO Prince blamed a “dramatic shift in macroeconomic conditions” for the move.

Considering that those conditions persist amid a rapidly cooling crypto market, the FTX exposure provides a convenient narrative for even more layoffs. That said, its reorganization may depend, to a large extent, on the shape of FTX’s unwinding.

The bankruptcy filing also comes at an opportune moment for the company’s CEO. He is on paternity leave.