BlockFi Crypto Customers Lose Fight Over Disputed Coin Transfers

Steven Church, Bloomberg News

The BlockFi logo on a smartphone arranged in the Brooklyn borough of New York, US, on Thursday, Nov. 17, 2022. Cryptocurrency lender BlockFi Inc. is preparing to file for bankruptcy within days, according to people with knowledge of the matter who asked not to be named because discussions are private. Photographer: Gabby Jones/Bloomberg , Bloomberg

(Bloomberg) -- BlockFi Inc. customers who tried to reclaim nearly $300 million in crypto after the company froze transfers last year don’t have a right to the digital assets, a judge ruled, handing potential losses to investors who held interest-bearing accounts.

US Bankruptcy Judge Michael Kaplan sided with the company and dismissed the objections of a group of customers, who argued they retained rights to the coins even before they were moved into a secure, digital wallet. Those who kept their assets in interest-bearing accounts gave up certain ownership rights, while those in custodial accounts did not. To protect themselves around the time of the freeze, users rushed to move coins into the safer digital wallets.

BlockFi, which is based in Jersey City, filed for bankruptcy in November with plans to either sell or reorganize its business to repay creditors. The ruling is similar to those made in other crypto-company bankruptcies. A federal judge in New York ruled that Celsius Network owns the coins that users placed in interest-bearing accounts.

Kaplan found that BlockFi stopped all transfers on Nov. 10 at 8:15 pm. Some customers tried to move their assets to safer, custodial wallets afterward and got messages on the company’s app saying the transfer was complete — but those notices were wrong, Kaplan ruled during a short court hearing Thursday.

“The user interface did not accurately reflect the transactions,” Kaplan said.

About $292 million worth of assets were trapped on the platform because customers tried to move them after the Nov. 10 halt, BlockFi said in court papers. Those transactions can now be canceled by the company, Kaplan ruled.

The disputes revolve around a central question in the biggest crypto company bankruptcies: Who owns the digital coins and other assets that customers deposit on the unregulated platforms? In the Celsius case, a judge in New York ruled that for about 600,000 customers do not own the assets they put into their accounts because of the way the user agreements were written.

The case is BlockFi Inc., 22-19361, U.S. Bankruptcy Court for the District of New Jersey (Trenton).