BlockFi creditors closer to recover $300 million as SEC temporarily foregoes penalty

• The US Securities and Exchange Commission resigned its $30 million penalty until bankrupt crypto lender BlockFi pays back creditors.
• A legal expert argues that the SEC was likely among the first creditors in line to receive payment from BlockFi while customers were last.
• BlockFi said $1 billion in funds recovery from bankrupt FTX and Alameda could help its users.

BlockFi, a bankrupt crypto lender once valued at $3 billion, is struggling to pay back its creditors. The Securities and Exchange Commission (SEC) relinquished the $30 million penalty that the lender owes to the regulator, according to court filings filed on Thursday, paving the way for investors to recover their funds.

Sasha Hodder, founder of Hodder Law, told CoinDesk that customers were the last on the list for recovery of funds. Therefore, the SEC’s move gives hope to customers that held assets in BlockFi’s custodial wallets.

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SEC provides relief to BlockFi 

The US SEC has made headlines for the past two weeks for its crackdown on cryptocurrency projects and exchange platforms. However, the recent move by the regulator provides temporary relief to bankrupt crypto lender BlockFi and favors a faster recovery of funds for its creditors.

As Samuel Bankman-Fried’s FTX exchange and Alameda fallout spread in November 2022, BlockFi filed for Chapter 11 protection in New Jersey. The crypto lender declared bankruptcy, saying  it would focus on recovering its funds placed on  exchanges like FTX. But FTX’s bankruptcy challenged BlockFi’s efforts to recover user funds.

BlockFi had agreed with the SEC to pay $50 million to settle charges of failing to register with the regulator for the offering and sale of its crypto lending products. The crypto lender still owes $30 million to the regulator, an amount that has recently been forgone, until BlockFi pays back its creditors.

Moreover, in a May 11 ruling, the bankruptcy judge asked BlockFi to pay the $300 million that was held by users in the lender’s custodial wallet. Customers are more likely to see the recovery of these funds after the SEC’s decision to relinquish its penalty temporarily. 

Legal expert says customers were last on BlockFi’s list

Sasha Hodder, founder of a firm that specializes in crypto law, told Coindesk that customers are at the bottom of the list in terms of fund recovery. In the bankruptcy hearing in July, BlockFi cited that recovery of funds from FTX exchange and Alameda would aid the recovery process for the crypto lender’s creditors, but didn’t provide concrete figures.

The SEC’s move has opened doors to fund recovery for creditors in a shorter timeline than before.

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