Crypto lender BlockFi is reportedly facing potential losses of up to $80 millions due to exposure to crypto miner Core Scientific, which raised the possibility of its bankruptcy in a regulatory filing.
Core Scientific, one of the largest US publicly traded crypto mining companies, said last week it is planning to skip payments due on equipment financing and promissory notes. The announcement, which came within a statement filed with the Securities and Exchange Commission, set the stage for a probable restructuring of the bitcoin miner.
The company’s stock was down as much as 77% following the filing, which could ultimately erase the value of its shares and possibly lead to bankruptcy. In the latter scenario holders of Core’s common stock could suffer “a total loss of their investment,” the regulatory filing states.
BlockFi is said to have lent Core Scientific as part of its program to finance bitcoin miners. The New Jersey-based lender used to take various assets pledged by borrowers to back up their requests for crypto loans. If the borrower gets the loan and fails to repay it, the lender has the right to seize the collateral to make up for the lost income.
Despite selling nearly all its bitcoin in June, Austin-based Core, which has operations in North Dakota, North Carolina, Georgia, and Kentucky, is down to less than $30 million in cash.
Making it worse for creditors, the miner intends to use the proceeds from the Bitcoin sales mainly for payments toward operational expenses such as ASIC servers and data-center capacity. Per Core’s filing, creditors can opt to sue the company for nonpayment, take action with respect to collateral, as well as “electing to accelerate the principal amount of such debt.”
“BlockFi runs a diversified lending business to the crypto ecosystem, of which mining-backed loans is a minority portion of our larger lending portfolio. These mining-backed loans are collateralized with mining equipment, and we follow the same prudent risk and underwriting practices that we implement across the rest of our institutional business. BlockFi holds risk capital reserves to protect against potential loan defaults, which includes the mining equipment finance business BlockFi’s chief risk officer, Yuri Mishkin told Protos.
Earlier this year, a prominent private fund downgraded the status of its investments in BlockFi. The Private Shares Fund has slashed valuations of BlockFi series E warrants to “worthless” compared to a valuation of $67 per unit in April.
A warrant agreement is a contract that provides one party the right to purchase a company’s stock at a specific price and at a specific date. As revealed in its report released at the end of June, the private fund also downgraded BlockFi’s preferred shares valuation to $20 per share, down from $77 three months ago.
The news came hot on the heels of Bankman-Fried’s decision to provide a $250 million credit line for BlockFi. The investment comes as BlockFi tries to restore confidence during a period of accelerating pressure after rivals Celsius Networks and Babel Finance froze withdrawals and transfers.