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The cryptocurrency trading and lending platform BlockFi filed for Chapter 11 bankruptcy on Monday, deepening the uncertainty for customers who already had been unable to access their deposits for several weeks.
BlockFi is the latest casualty of the collapse of FTX, the cryptocurrency exchange that imploded in early November amid reports that it had used customer funds on risky bets.
The two firms had become intertwined, with FTX striking a deal to buy BlockFi as crypto’s bear market took hold earlier in 2022. As FTX began to spiral, BlockFi suspended withdrawals, citing financial difficulties. Now, customers could face new hurdles to getting their money back.
What can BlockFi customers do?
BlockFi says that customers seeking information about assets held on its platform should contact the company’s claims agent, a representative hired to deal with creditors in large bankruptcy cases.
Documents filed in court by BlockFi estimated that it owes somewhere between $1 billion and $10 billion to more than 100,000 creditors.
In a message posted on its website, BlockFi sought to reassure clients that its management would try to make good on the company’s debts. Chapter 11 bankruptcy typically is used to reorganize, rather than fully liquidate, a business. The company said in its legal filing that it has more than $1 billion in assets.
“These Chapter 11 cases will enable BlockFi to stabilize the business and provide BlockFi with the opportunity to consummate a reorganization plan that maximizes value for all stakeholders, including our valued clients,” the message said.
That may not be much comfort to customers who had figured funds held on BlockFi’s platform were safe before the sudden collapse. But there are some things you can do right away to start the claims process.
You can document what you had on BlockFi’s platform and what it was worth. It might be a good idea to compare whatever information you can get from BlockFi to any records you may have maintained.
» Learn more: How to navigate an exchange collapse
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What comes next?
The bankruptcy process can be long and winding, so some customers may wait awhile before they know what they can recover — if anything.
But the continuing ripples of the FTX financial crisis have highlighted some potential vulnerabilities in the crypto world, especially among centralized exchanges that allow users to convert cash into cryptocurrency.
Even if you don’t use BlockFi or FTX, it’s not a bad idea to consider whether you want to continue storing crypto on these types of services. Unlike banks and brokerage firms in traditional finance, crypto businesses lack uniform protections against customer losses, such as coverage from the Federal Deposit Insurance Corp. or the Securities Investor Protection Corp.
There are some virtues to using a centralized service for crypto storage. In short, they have services that provide easy crypto market access to users who are not comfortable with tools such as personal crypto wallets.
However, the flip side is that if an exchange collapses while holding your crypto, your assets could go with it.
In response to recent events, some crypto exchanges have begun publicizing additional details about what they hold in reserve to back up customer deposits. Examining these data may help you make an informed decision about where to buy or store your crypto.
If you’re still uncomfortable using an exchange to store your crypto, consider learning how to get a crypto wallet. However, wallets come with their own risks: if you lose your login information, your crypto may be difficult to access.
» Learn more: NerdWallet's picks for top crypto wallets
But unlike exchanges, a wallet keeps vital information for your crypto in your custody, so even if the company that made your wallet goes bust, you’ll still be able to spend or transfer your funds.