When we last reported on the issue of the ownership of crypto assets, we focused on the distinction between Wallet Accounts and BlockFi Interest Accounts ("BIA"). As previously mentioned, in terms of the prospects of recovering their assets, customers would be in a far better position to recover from the bankruptcy estate if they held their assets in a Wallet Account. There has been a significant update in the BlockFi bankruptcy case, as Judge Kaplan has issued his ruling on BlockFi's Wallet Withdrawal Motion. Because of this ruling, customers who recently transferred their assets to Wallet Accounts still might need to wait longer than others to recover their assets.
BlockFi’s Wallet Withdrawal Motion attempted to return assets to those customers who held their assets in Wallet Accounts before BlockFi paused all customer withdrawals and transfers (the “Platform Pause”), in an attempt to limit the impact of the collapse of FTX and Alameda Research. BlockFi engineers spent multiple days investigating how to disable the client-facing transfer request functionality. As a result, customers could still complete a transfer request to try to transfer their assets from BIA to a Wallet Account. In fact, customers were still receiving automatic notifications that their transfer request had been received and completed. It took BlockFi eight days after the Platform Pause to fully disable the client-facing transfer request functionality on all versions of the BlockFi user interface.
BlockFi's counsel argued that transfers after the Platform Pause were not effective, because the Platform Pause suspended all BlockFi’s back-end processes necessary to actually effectuate the transfer requests. BlockFi's counsel argued that the simple click of a button on BlockFi's user interface does not automatically execute the transfer. BlockFi's counsel also pointed to their Terms of Service ("TOS") in support of their argument, specifically the provision that stated, "You acknowledge and agree that BlockFi, in its sole discretion, may suspend or discontinue your, and refuse any and all current and future, access to or use of you BlockFi Account at any time without notice to you.” BlockFi's counsel used this and other provisions from their TOS to argue that customers were on notice that something like the Platform Pause could happen at any time.
In seeking recovery for those customers who had attempted transfers after the Platform Pause, Counsel for the Ad Hoc Committee of Wallet Account Holders relied on language from BIA’s TOS, which stated, "Any withdrawal of principle will be transferred instantly to your BlockFi Wallet and any withdrawal from your BlockFi Wallet will be subject to BlockFi Wallet Terms.” Counsel relied on this provision to argue that the transfers that occurred in the eight days after the Platform Pause, but before the transfer requests on the user interface were shut down, were effective. Counsel also argued that customers had no way of knowing that their transfer requests were not actually completed because they received automated emails notifying them that the transactions had been completed. Finally, counsel argued that granting this motion would not be an equitable result because it would be picking winners and losers based on a mere timestamp.
Ultimately, Judge Kaplan agreed with BlockFi's counsel and granted this motion. Judge Kaplan ordered that assets held in Wallet Accounts prior to the Platform Pause be returned to customers. The ruling focused on the fact that, in the court's view, these transfers did not actually occur because BlockFi’s back-end processes necessary to complete the transactions never occurred. Thus, those who attempted a transfer after the pause did not have an effective transfer.
While this is a favorable result for some, this undoubtedly hurts many unknowing customers who thought they had completed effective transfers after the Platform Pause, relying on messages sent to them directly by BlockFi. While noted as "unfortunate" by Judge Kaplan, this was not enough to sway his ruling on the matter. At the end of the day, the courts handling these crypto bankruptcy cases will likely have to continue picking winners and losers, like this court did, since there are simply not enough assets available to make everyone whole.
This article provides an overview and summary of the matters described therein. It is not intended to be and should not be construed as legal advice on the particular subject.