BlockFi Settles $35 Million DOJ Dispute in Bankruptcy Proceedings

BlockFi, a prominent crypto lender, has achieved a significant milestone in its bankruptcy proceedings with the approval of a $35 million settlement with the US Department of Justice (DOJ). Judge Michael B. Kaplan of the US Bankruptcy Court for the District of New Jersey endorsed the settlement, which resolves a dispute over the transfer of crypto assets. The lawsuit, filed in May 2023, involved the DOJ's attempt to seize over $35 million in crypto assets from BlockFi accounts linked to two Estonian citizens involved in an unrelated criminal fraud case. The DOJ argued that it had valid warrants to seize these assets, while BlockFi contended that the transfer should be authorized by the bankruptcy court.

The settlement, which dismisses the case with prejudice, means that the matter cannot be refiled. Both parties will bear their own legal fees and costs. This resolution is a crucial step in BlockFi's ongoing efforts to wind down its operations and repay creditors. The settlement was reached between the administrator overseeing BlockFi’s bankruptcy proceedings and the DOJ, with Mohsin Meghji representing BlockFi and senior trial counsel Seth B. Shapiro representing the DOJ.

BlockFi's bankruptcy journey has been fraught with challenges, stemming from the collapse of FTX in November 2022. The crypto lender announced its plans to shut down its web platform in May 2023 and partnered with Coinbase to facilitate client withdrawals. Eligible users, including those with BlockFi Interest Accounts, retail loans, and private client accounts, were instructed to use Coinbase for withdrawals, with a deadline set for April 28, 2024. This move was part of BlockFi's broader strategy to reimburse its customers as much as possible following its Chapter 11 bankruptcy filing.

Prior to the DOJ settlement, BlockFi had already reached a significant agreement in March 2023, settling $875 million with the estates of FTX and Alameda Research. This settlement resolved approximately $1 billion in claims between the firms. CEO Zac Prince testified that the actions of FTX founder Sam Bankman-Fried directly led to BlockFi's bankruptcy, highlighting the interconnected nature of the crypto industry. The bankruptcy court approved BlockFi’s Chapter 11 plan in September 2023, allowing the company to begin repaying over 10,000 creditors. BlockFi owes approximately $10 billion to more than 100,000 creditors, with major debts owed to top creditors and the bankrupt hedge fund Three Arrows Capital.

The settlement with the DOJ is a significant development in BlockFi's bankruptcy proceedings, resolving a contentious issue that could have further complicated its efforts to wind down operations and repay creditors. The dismissal of the lawsuit with prejudice ensures that the matter is conclusively resolved, allowing both parties to focus on other aspects of the bankruptcy process. This settlement is part of a broader effort by BlockFi to address its financial obligations and move towards a resolution of its bankruptcy case. As the crypto community continues to learn from these events, there is a growing emphasis on new rules and improved risk management to prevent similar issues in the future. Clients of BlockFi are now anticipating the size of the compensation they will receive once the company completes its liquidation process.