A New Jersey judge has ruled that BlockFi custodial wallet users can be returned nearly $300 million, as assets sitting in the wallets belong to clients rather than the estate of the bankrupt crypto lender.
The ruling comes after BlockFi filed for Chapter 11 bankruptcy in November 2022, shortly after FTX’s collapse.
Bankruptcy Judge Michael Kaplan also ruled against repaying a further $375 million in funds that clients tried to withdraw from BlockFi’s interest-bearing accounts, known as BIA, after the company froze funds last year.
Kaplan said that all digital assets held by the debtors in custodial omnibus wallets are client property, and not property of the bankruptcy estates, subject to possible avoidance and clawback rights.
However, he had less happy news for BIA customers, stating that “No transfer request by customers between the BIA and the custodial wallet accounts initiated after 8.15 pm on November 10, 2022, were effectuated and completed.”
BlockFi’s reimbursement was held up by a dispute over the status of funds held in BIA, which customers tried to liquidate after November 10, when BlockFi paused transfers, and November 18, when it made corresponding changes in the app.
Deborah Kovsky-Apap of law firm Troutman Pepper argued that her clients, who all attempted to transfer BIA holdings in that interim period, should be included in any repayment.
However, Michael B. Slade, representing BlockFi, said no sale of the assets had been completed, even though those clients received email confirmation that it had, as the user interface had been “deliberately divorced” from underlying transactions.
