Bankrupt crypto lender wants to return deposits, but it's not that simple

Bankrupt crypto lender BlockFi wants to urgently resume platform withdrawals, so customers can have their funds back.

Why it matters: While that move may seem logical (especially to customers), it would be precedent-in-the-making for future crypto cases, touching on the all-important hierarchy of unsecured creditors.

The big picture: "There are precedents in a non-crypto exchange situation. The law is very clear," Evan Jones, partner in the bankruptcy and restructuring group of O’Melveny & Myers, tells Axios.

• A client at a regulated broker-dealer would be first in line among unsecured creditors to get their money back in the event a firm failed, Jones explains, referencing those situations covered by the Securities Investor Protection Act (SIPA).
• "That law is developing with regard to crypto exchanges," he says.

Driving the news: During BlockFi's first hearing Tuesday in New Jersey, Kirkland Ellis partner Joshua Sussberg, representing BlockFi during the bankruptcy proceeding, said the firm intends to quickly file a motion requesting the resumption of customer withdrawals.

• "You would not be surprised, your Honor, from exchange to exchange, the Terms of Use are not necessarily the same," Sussberg said, explaining that BlockFi has promised its Wallet customers that what's theirs is theirs.
• “We do not believe this is the property of the estate."

Yes, but: That doesn't mean bankruptcy courts will allow BlockFi, FTX, Celsius and Voyager customers to be treated as SIPA liquidations would, in preference to general unsecured creditors.

• A creditors' committee would have to be formed and agree with BlockFi's plans.

Zoom in: Terms of Service is "the key issue" in token ownership, according to Evans. They vary from platform to platform, and their makers may not necessarily have held up their end of the contractual agreement.

• After all, FTX's terms forbid trading with customer funds.

BlockFi's says: "The title to the cryptocurrency held in your BlockFi Wallet shall at all times remain with you and shall not transfer to BlockFi."

The bottom line: Customers are in uncharted waters.