Ripple General Counsel Says SEC Responsible For BlockFi Insolvency

Alderoty believes that the SEC settlement deal with BlockFi backed the crypto lender into a corner, putting customers at risk.

Ripple General Counsel Stuart Alderoty laid the potential collapse of BlockFi at the feet of the US Securities and Exchange Commission in a couple of tweets on Sunday to establish a trend of the regulator hurting consumers.

Nothing was ever “registered” per the BlockFi/SEC deal. What about the first two payments on the $100M fine? If they were made, did the SEC confirm BlockFi’s ability to pay and/or the source of funds? FTX b/cy shows a $250M loan to BlockFi and now customer funds are blocked.

— Stuart Alderoty (@s_alderoty) November 27, 2022

According to Alderoty, it is not clear that the SEC carried out its due diligence to ensure that the crypto lender could pay the $100 million fine it was slapped with as part of a settlement deal in February, nor did it confirm the source of this funding. The Ripple GC speculates that BlockFi’s settlement with the SEC forced it to get in bed with FTX, citing the $250 million loan BlockFi received from FTX in June, as seen in FTX’s bankruptcy filings.

The filings show that FTX made the loan in FTT, its highly illiquid exchange token.

With FTX in bankruptcy proceedings, BlockFi customers risk losing their funds as the lender has paused operations.

Notably, Ripple CTO David Schwartz surmising Alderoty’s thoughts, also stoked the flames of rumors that in exchange for the line of credit, BlockFi kept customer funds on FTX.

“… BlockF [BlockFi] borrowing funds from FTX for fines may be connected to BlockFi assets being stored at FTX,” Schwartz tweeted. “In other words, the SEC may have made BlockFi so weak financially that it had no choice but to store crypto at FTX to continue operating, possibly the cause of their collapse.”

It bears mentioning that BlockFi denied these claims in response to Frequently Asked Questions 4 days ago. However, it concedes that it has significant exposure to the bankrupt crypto exchange.

“The rumors that a majority of BlockFi assets are custodied at FTX are false,” the crypto lender wrote. “However, as shared, we have significant exposure to FTX and associated corporate entities that encompasses obligations owed to us by Alameda, assets held at FTX.com, and undrawn amounts from our credit line with FTX.US.”

Contextual Information 

Notably, the crypto lender had entered a $100 million settlement with the SEC in February over its interest-yielding product. It is unclear when BlockFi made the payment, but reports and SEC statements indicate that BlockFi has indeed made the payment.

In June, the firm received a $250 million line of credit from FTX, saying it had to liquidate a large client, many speculate to be Three Arrows Capital, in the wake of the Terra collapse. Additionally, in July, it received an additional $400 million line of credit from FTX.US, citing market volatility in the wake of the Celsius and 3AC collapse, with an option for the exchange to buy out the lender at $240 million, depending on operational conditions.

Consequently, it is not clear that the SEC fine was the catalyst for the crypto lender’s current predicament that might see it eventually file for bankruptcy protection.

All of these come as the crypto community, especially the XRP community, who know more than most what it is like to be at the receiving end of SEC enforcement, poke holes at the SEC’s operations. As previously reported, Alderoty had asserted that SEC chief Gary Gensler should also face investigations for the FTX collapse. He asserted that the SEC’s modus operandi under Gensler has been to coerce crypto firms into backroom deals.

As previously reported by The Crypto Basic, the crypto community, in the wake of the FTX collapse, has drawn the attention of Congress to links between FTX founder Sam Bankman-Fried and Gensler.