BlockFi Dismisses $35 Million Lawsuit With DOJ Settlement

BlockFi Trust Company LLC has reached a settlement with the U.S. Department of Justice, leading to the dismissal of a $35 million lawsuit related to crypto asset transfers. The agreement, approved by Judge Michael B. Kaplan of the US Bankruptcy Court for the District of New Jersey, dismisses the case with prejudice, meaning it cannot be refiled. This resolution comes as a critical development in BlockFi's ongoing bankruptcy proceedings, which were initiated in November 2022 following the collapse of FTX.

The lawsuit, filed in May 2023, sought to transfer over $35 million in crypto assets from BlockFi to the US government. The DOJ claimed that it had warrants to seize the funds from the BlockFi accounts of two Estonian citizens in a criminal fraud case unrelated to BlockFi’s bankruptcy. The DOJ argued that the US Bankruptcy Court for the District of New Jersey did not have the jurisdiction to prevent BlockFi from transferring the assets, leading to a dispute during BlockFi's bankruptcy proceedings. Under the terms of the settlement, each party will bear its own legal fees and costs. Mohsin Meghji, Plan Administrator for BlockFi’s wind-down estates, represented the crypto firm in the case. The Department of Justice was represented by senior trial counsel Seth B. Shapiro and his team from the Civil Division’s Commercial Litigation Branch.

This settlement marks a significant development in BlockFi's bankruptcy proceedings, as it resolves a contentious issue that had the potential to further complicate the company's wind-down process. The dismissal of the lawsuit with prejudice ensures that the matter will not be revisited, allowing BlockFi to focus on its ongoing efforts to repay creditors and wind down its operations. The agreement also highlights the importance of cooperation between the bankruptcy administrator and regulatory authorities in navigating complex legal disputes during the bankruptcy process.

The settlement between BlockFi and the DOJ comes at a critical time for the crypto lender, as it continues to work through its bankruptcy and wind-down process. In May last year, BlockFi announced plans to shut down its web platform while partnering with Coinbase to help clients withdraw their remaining funds. Eligible users, including those with BlockFi Interest Accounts, retail loans, and private client accounts, can use Coinbase for withdrawals. The company declared bankruptcy in November 2022 following the collapse of FTX and subsequently set a withdrawal deadline of April 28, 2024, for customers to reclaim their crypto holdings.

In March last year, BlockFi also reached an $875 million settlement with FTX and Alameda Research estates, resolving about $1 billion in claims. CEO Zac Prince testified that FTX founder Sam Bankman-Fried’s actions directly caused BlockFi’s bankruptcy. The bankruptcy court approved BlockFi’s Chapter 11 plan in September 2023 to repay over 10,000 creditors. BlockFi owes approximately $10 billion to more than 100,000 creditors, including major debts to its top three creditors and the bankrupt hedge fund Three Arrows Capital.

The dismissal of the $35 million lawsuit is a positive step in this direction, as it removes a significant legal hurdle and allows BlockFi to focus on its core priorities. The company's partnership with Coinbase to facilitate customer withdrawals and its Chapter 11 plan to repay creditors demonstrate its commitment to resolving its financial obligations and moving forward from its bankruptcy. The broader implications see a trend toward settlements over protracted legal battles, aligning with prior cases like Gemini Earn. This reflects a possible de-escalation of aggressive enforcement movements. Reaction from prominent crypto figures remains scarce, with community sentiment muted.

Financial outcomes focus on preserving BlockFi's resources post-lawsuit. Regulatory statements were limited, but informally signal reduced legal pressures on crypto entities. Historical trends of negotiated settlements suggest potential shifts in regulatory frameworks, impacting crypto market dynamics. The crypto assets involved remain undisclosed, but generally include BTC and ETH. On-chain data shows stability with no noticeable liquidity impacts in broader markets.