In a significant development in BlockFi’s bankruptcy case, the crypto lender’s bankruptcy administrator and the US Department of Justice (DOJ) have reached an agreement to dismiss a $35 million lawsuit concerning crypto assets. The settlement, approved by Judge Michael B. Kaplan of the US Bankruptcy Court for the District of New Jersey, brings closure to a legal dispute that added further complexity to BlockFi’s already troubled restructuring process.
DOJ Wanted $35M in Crypto Seized
The lawsuit was first filed in May 2023 during the peak of BlockFi’s bankruptcy proceedings. The DOJ aimed to seize over $35 million in crypto from accounts tied to two Estonian nationals, who were facing criminal fraud charges unrelated to BlockFi’s operations.
The funds were held within BlockFi’s platform, and the DOJ claimed to have valid warrants authorising the seizure. However, the bankruptcy court intervened, and a jurisdictional dispute followed. The DOJ argued that the bankruptcy court didn’t have the authority to prevent it from taking control of the funds.
Despite the unrelated nature of the alleged criminal activity, the funds’ presence within BlockFi’s estate made them part of the complex web of bankruptcy claims, leading to legal friction between federal authorities and the bankruptcy administrators.
Settlement Terms: Case Dismissed with Prejudice
Under the recent agreement, both parties decided to end the legal battle. The case has been dismissed with prejudice, which means it cannot be brought to court again in the future. Importantly, each party will cover its own legal fees and costs, avoiding further financial drain on BlockFi’s remaining assets.
Mohsin Meghji, the Plan Administrator overseeing BlockFi’s wind-down process, represented the firm, while the DOJ was represented by Seth B. Shapiro, senior trial counsel from the Civil Division’s Commercial Litigation Branch.
This settlement helps simplify the bankruptcy proceedings and prevents further delays in returning remaining funds to BlockFi’s users and creditors.
Customer Withdrawals: Coinbase Steps In to Help
BlockFi announced in May 2024 that it would shut down its web platform but struck a deal with Coinbase to help customers withdraw their remaining crypto assets. This includes users with BlockFi Interest Accounts, retail loans, and private wealth accounts.
A withdrawal deadline of April 28, 2024, was set for eligible customers to claim their holdings. This was a crucial move to ensure users could still access their assets while the platform winds down.
BlockFi filed for Chapter 11 bankruptcy in November 2022, shortly after the collapse of the now-defunct FTX exchange, which had ripple effects across the entire crypto sector.
BlockFi’s Other Legal Battles and Creditors
Earlier, in March 2023, BlockFi also reached an $875 million settlement with the FTX and Alameda Research estates. That agreement resolved about $1 billion in claims between the two bankrupt companies.
During testimony, BlockFi’s CEO Zac Prince blamed the collapse of FTX and actions taken by its founder Sam Bankman-Fried as the direct cause of BlockFi’s downfall.
In total, BlockFi owes about $10 billion to over 100,000 creditors, including several high-profile institutions and the bankrupt hedge fund Three Arrows Capital. In September 2023, the bankruptcy court approved BlockFi’s restructuring plan to repay creditors under Chapter 11.
A Step Closer to Closure for BlockFi
The dismissal of the DOJ’s $35 million asset seizure lawsuit marks a positive step in untangling the legal and financial complications surrounding BlockFi’s bankruptcy. While it doesn’t change the fact that thousands of users and creditors are still waiting for repayment, it does remove one more roadblock in the wind-down process.
As BlockFi partners with Coinbase to return funds and resolves disputes with other collapsed firms like FTX, the once-prominent lender is inching closer to closing a turbulent chapter in its history, a cautionary tale of the cascading failures that followed the FTX implosion.
