BlockFi Seeks to Return Customer Funds

What Happened: BlockFi, the defunct crypto lender that filed for bankruptcy at the end of November, is taking steps to return customer funds. According to an email it sent users, the company filed a motion with the U.S. Bankruptcy Court asking for authority to let BlockFi Wallet account holders withdraw their assets. The company plans to make the same move in front of the Supreme Court of Bermuda for non-U.S. wallet holders.

“While filing this motion is an initial step, we will continue to work towards solutions that maximize value for all clients and other stakeholders and will share updates as quickly as practicable,” the email to users said.

That's not all. Some users attempted to withdraw funds before BlockFi officially froze their accounts. Those assets didn't leave the platform but aren't reflected in users' balances -- they're currently in limbo. BlockFi wants to fix this. If the court approves its application, BlockFi could update users' balances which would then make it easier for the cryptocurrency platform to honor future withdrawals.

So What: One of the big challenges for crypto investors is the lack of investor protection. Money held in a bank is protected against failure by FDIC insurance, but this does not apply to a lot of crypto assets. Some top crypto exchanges say funds held in U.S. dollars -- not crypto assets -- are covered by FDIC insurance. It isn't clear how the money people deposited on crypto platforms will be handled in the different bankruptcy cases.

BlockFi is sending a clear message that the funds held in its BlockFi wallets belong to its clients and should not get pulled into any bankruptcy proceedings. The move sets BlockFi apart from other platforms (such as Celsius and FTX) that have also filed for bankruptcy this year. If the court gives it the green light, crypto held in BlockFi wallets could be released directly to users. 

Now What: If you're a BlockFi customer, pay attention to emails you receive from the company and don't panic if you see changes to your account balance. Bear in mind that the move only applies to funds held in BlockFi wallets. The motion does not apply to funds held in BlockFi Interest Accounts. Key dates to watch are:

• Jan. 9, 2023: U.S. Bankruptcy Court will hear the motion
• Jan. 13, 2023: Supreme Court of Bermuda hearing

If you're a crypto investor with funds held on any exchange, don't assume your assets are safe. It's worth taking time to learn how non-custodial crypto wallets work. They won't be right for everybody, but they do put your digital assets firmly under your control. Importantly, non-custodial crypto wallets mean funds won't be impacted by any further crypto exchange failures.