BlockFi, a prominent cryptocurrency lending platform, recently petitioned a court for permission to convert its users’ trade-only assets into stablecoins. The crypto exchange submitted the request on August 29 to the United States Bankruptcy Court’s District of New Jersey regarding certain assets. However, these assets consist of Dogecoin (DOGE), Bitcoin Cash (BCH), and Algorand’s native token (ALGO). Currently, users are unable to withdraw these specific cryptocurrencies, and BlockFi recommends exchanging them for Gemini Dollar (GUSD) or another stablecoin just once.
According to BlockFi’s application, the assets used only for trading constitute less than 0.5% of the total wallet assets held by BlockFi members in the U.S. However, BlockFi International has separate holdings of trade-only assets such as Cardano (ADA), Solana (SOL), Avalanche (AVAX), and other similar assets.
The move comes as the company faces increasing regulatory scrutiny, particularly from the U.S. Securities and Exchange Commission (SEC). The application aims to provide a legal framework that would allow BlockFi to offer its users a more stable and secure form of asset to withdraw their monies.
While stablecoins are generally considered less volatile than other cryptocurrencies like Bitcoin or Ethereum, they are not entirely free from regulatory oversight. The SEC and other financial watchdogs have been closely monitoring stablecoin issuers and platforms that offer stablecoin-related services.
From bankruptcy to asset conversion and court battles
If the court grants permission, BlockFi’s users could see a significant shift in how their assets are managed. The conversion to stablecoins would offer a less volatile investment option, potentially attracting more risk-averse investors to the platform. However, this change could also raise questions about the liquidity and accessibility of these assets, as stablecoins are often subject to regulatory guidelines that could limit their use in certain transactions.
In 2022, several cryptocurrency companies, including BlockFi, FTX, Celsius Network, and Voyager Digital filed for Chapter 11 bankruptcy protection in the United States. This led to BlockFi temporarily halting customer withdrawals from November 2022. However, after a nine-month period, BlockFi was granted permission by the court to resume withdrawals on August 16.
The court also conditionally approved BlockFi’s restructuring plan, with priority given to recovery of funds from companies such as Alameda Research, FTX, Three Arrows Capital, Emergent, and Core Scientific. It’s worth noting that BlockFi’s legal team attempted to prevent FTX from recouping hundreds of millions of dollars to cover its debts.