BlockFi custodial wallet users can be returned nearly $300 million, as a New Jersey judge ruled on Thursday May 11 that assets sitting in the wallets belong to clients rather than the estate of the bankrupt crypto lender.
Bankruptcy Judge Michael Kaplan 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, as ripples from the collapse of FTX spread through the crypto ecosystem.
“The court finds that all digital assets held by the debtors in custodial omnibus wallets are indeed client property, and not property of the bankruptcy estates, subject, of course, to possible avoidance and clawback rights,” Judge Kaplan said, but had less happy news for BIA customers.
“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,” Kaplan said, despite the crypto company’s user front-end appearing to confirm that they had successfully shifted funds.
“BIA 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,” he said, but custodial wallet holders “did not share this risk or return and should not have their ownership of non estate property diluted by those who took on such risks.”
Under bankruptcy law, funds which are deemed to belong to customers can be returned immediately, rather than being divided up among creditors of the company’s estate.
In this case reimbursement was held up by a dispute over the status of funds held in BIA which customers tried to liquidate after Nov. 10, when BlockFi paused transfers, and Nov 18, when it made corresponding changes in the app.