Decentralization advocates are again calling for crypto users to exercise caution when storing funds on custodial platforms following a controversial decision from the U.S. legal system.
On May 11, bankruptcy judge Michael Kaplan permitted insolvent crypto lender BlockFi to return $297M worth of assets to customers’ non-interest-bearing “Wallet” accounts.
The ruling excludes around 48,000 users who attempted to move $375M of assets out of interest-bearing accounts as the platform shut down on Nov. 10.
“[Interest-bearing] account holders deposited their assets into these accounts with the full knowledge that they were undertaking certain risks in exchange for the chance of greater returns,” Kaplan said.
BlockFi was among the major crypto firms that imploded as contagion risk swept across the CeFi sector amid last year’s bear market. BlockFi halted suspended user withdrawals on Nov. 10 and filed for bankruptcy protection two weeks later, citing exposure to FTX, the failed centralized exchange.
Judge Kaplan said only BlockFi customers holding assets in Wallet accounts prior to the platform shutting down hold a legal claim over the assets they deposited with the platform. By contrast, users seeking yields via its interest-bearing accounts were deemed to have handed their assets over to BlockFi to use as part of its lending business.
The verdict comes after similar rulings for CeFi lenders Voyager and Celsius, both of which filed for bankruptcy last July. Customer assets held in interest-bearing accounts were found to be the property of the insolvent firm in both rulings, with the funds set to be pooled alongside the firm’s other assets to repay creditors in the future.
Confirmed Transactions
Lawyers representing BlockFi’s users argued that the company should honor the withdrawal requests made on Nov. 10 as customers received automated messages confirming that their transfers had been completed.
However, the judge noted that BlockFi’s terms of service allow it to block transfer requests when shutting down. He added that the company did not complete the transfers on the platform’s back end despite sending the confirmation emails.
“A customer’s withdrawal or transfer request on the user interface did not and does not automatically transfer digital assets,” Kaplan said.
In an earlier hearing, BlockFi’s lawyers argued that repaying the additional $375M would dilute Wallet customers and could impact the firm’s ability to return funds to users.
