The BlockFi matter arose from the Chapter 11 bankruptcy of BlockFi Inc.—and its affiliated debtors—a cryptocurrency financial-services firm that offered interest-bearing digital-asset accounts, crypto-collateralized lending, and related products. The central economic issue was the Solvency of the enterprise during 2022. As a start-up operating in a nascent industry, BlockFi carried the financial profile typical of such firms—negative book equity, negative earnings, negative cash flows, rapid revenue growth, and high leverage. During 2022, a broad contraction in digital-asset markets—including the collapse of the Terra/Luna tokens, the failure of other crypto lenders, and the liquidation of a major crypto hedge fund—culminated in the collapse of FTX and its affiliate Alameda Research—to which BlockFi had significant exposure. BlockFi Inc. and eight affiliated debtors filed voluntary Chapter 11 petitions on November 28, 2022.
Professor Mark E. Zmijewski was retained as a consulting expert in connection with the BlockFi bankruptcy. He did not testify. His assignment was to identify the arguments for and against concluding that BlockFi was insolvent during the period January 2022 through October 2022 and to reach a conclusion regarding the company’s solvency over that period. Professor Zmijewski was supported by Keith Bockus and Pavel Nikolov.
At a high level, Professor Zmijewski’s analysis applied the three standard solvency tests: the Balance Sheet Test, which examines whether the fair value of a firm’s assets exceeds the face value of its liabilities; the Cash Flow Test, which examines whether a firm can reasonably be expected to pay its financial obligations as they come due; and the Capital Adequacy Test, which examines whether a firm has adequate capital. He evaluated contemporaneous evidence bearing on each test, including the company’s private financing transactions and their implied valuations, its mark-to-market financial statements, the value of its intangible assets, and—centrally—the appropriate economic characterization of the July 2022 FTX line of credit, an instrument that exhibited both debt and equity characteristics.