BlockFi Files Lawsuit Alleging State Commission’s Failure to Accept Surrendered License

BlockFi Files Lawsuit Alleging State Commission's Failure to Accept Surrendered License

BlockFi Inc. specializes in consumer financing services. The company offers loans to cryptoasset owners to collateralize with their cryptoassets. BlockFi provides risk management, financial technology, and digital financing solutions.

The bankrupt crypto exchange is seeking to surrender its license, but regulators are maintaining their position for a costly court proceeding, according to BlockFi’s assertions.

BlockFi, a bankrupt cryptocurrency lender, has sued Connecticut Banking Commissioner Jorge Perez in the U.S. Bankruptcy Court of New Jersey. This legal action was taken because the state regulator has consistently declined BlockFi’s request to give up its Connecticut money transmitter license, which the company obtained in April 2020. Instead, the regulator has insisted on an administrative proceeding, which would require BlockFi to represent itself in another court case.

Following BlockFi’s Chapter 11 bankruptcy filing in November, the company was informed that it would have to give up its Connecticut money transmitter license. In an attempt to surrender the license, BlockFi made the request in December. However, the regulatory authority never provided a response or acknowledgement.

In February 2023, the regulatory authority unexpectedly notified BlockFi that its Connecticut money transmitter license was being revoked. The notice also demanded that BlockFi stop conducting business with the residents of the state. However, this action came after BlockFi had already ceased all operations and filed for bankruptcy in November. Essentially, the notice from the Connecticut Department of Banking was irrelevant, as BlockFi had already halted its activities prior to its issuance.

Upon receiving the notices, the cryptocurrency exchange made an attempt to prevent further court proceedings by once again proposing to surrender its money transmitter license. Since March, one of BlockFi’s attorneys has engaged in multiple phone calls with a staff attorney from the Connecticut banking department. During these discussions, it was conveyed to the company that it would be required to pay a fine of $1 million in order to avoid going through a court proceeding.

BlockFi’s legal action against the Connecticut banking commissioner has resulted in the company needing to hire specialized legal counsel familiar with lawsuits involving the banking department. BlockFi has expressed that this hiring process will be costly for the company’s funds and will also require the time and resources of the directors to handle the court case.

BlockFi currently has a debt of $1 billion to its three biggest lenders, and there are also numerous small-scale investors who are waiting to withdraw their money. To address this, BlockFi received permission earlier this year to sell off its remaining assets. This is aimed at generating funds to repay its clients and fulfill their financial obligations.

According to BlockFi’s complaint, the actions taken by the Department to revoke the license and impose monetary fines are driven by their financial motives and not by the intention to safeguard the public’s well-being, safety, or welfare.

The lawsuit said the cryptocurrency company has two goals: first, it seeks to pause the court proceedings, setting a date to create a restructuring plan; and second, it wants to prove the department violated Section 525 by revoking BlockFi’s license and pursuing civil penalties.

Perez has already received a summons, and BlockFi will present its case to support its motion to avoid the court proceeding on July 6. However, as of now, the administrative proceeding that the bankrupt crypto exchange has been attempting to avoid is still set to commence on July 20.

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