BlockFi, a cryptocurrency lender that targeted ordinary investors eager for a piece of the crypto mania, filed for bankruptcy on Monday, felled by its financial ties to FTX, the embattled exchange whose recent downfall has shaken the crypto industry to its core.

Based in Jersey City, N.J., BlockFi marketed itself primarily to small investors, offering them loans backed by cryptocurrency in minutes without credit checks, as well as accounts that paid high interest on crypto deposits. As of last year, the lender claimed to have more than 450,000 retail clients.

On Monday, BlockFi, which was founded in 2017, filed for Chapter 11 protection in New Jersey. Its implosion is the latest example of an industry built on shaky foundations, with companies so intertwined that a single wobble can unleash financial chaos.

BlockFi isn’t the first crypto lender to file for bankruptcy. In July, two of its rivals, Celsius Network and Voyager Digital, collapsed within a week of each other. They were struggling to right themselves after a market panic in the spring, when the value of many high-profile cryptocurrencies plummeted. Bitcoin alone fell 20 percent in a week.

BlockFi Ran Out of Lifelines

Formerly one of the world’s largest crypto exchanges, the collapse of FTX has rapidly accelerated the spread of contagion throughout the cryptocurrency industry.

The Bahamas-based exchange filed for bankruptcy on Nov. 15, with an estimated  $8 billion hole on its balance sheet. In addition to FTX, 130 related entities have filed for bankruptcy.

It’s estimated that FTX owes its top 50 creditors $3.1 billion, according to documents filed with the bankruptcy court, including BlockFi.

BlockFi accepted a package of loans worth up to $400 million from FTX earlier this year. The package came in the form of a bailout to help the distressed crypto exchange survive a liquidity crunch that arose originally from its exposure to the meltdown of the TerraUSD stablecoin.

The Terra collapse wiped out around half a trillion dollars in market capitalization from broader crypto markets.

FTX’s “white knight” deal gave it the right to acquire BlockFi within a year, and shored up liquidity for the distressed firm.

BlockFi advisor Mark Renzi stated in court filings that Three Arrows Capital had been “one of BlockFi’s largest borrower clients.” The Singapore-based hedge fund had been heavily invested in TerraUSD, exposing the tangled web of the crypto world.

This earlier round of contagion forced crypto lenders like Celsius and Voyager Digital to file for bankruptcy protection. Celsius went underwater, reportedly owing customers $4.7 billion. Meanwhile, the bill for Voyager was $1.3 billion.

While FTX’s credit facility prevented BlockFi from going under over the summer, ultimately, neither firm escaped the widening reach of the crypto meltdown.

Changpeng Zhao, CEO of crypto exchange Binance, is disclosing Binance’s reserves and calling for the industry to become more transparent.

But critics argue that presenting proof of reserves means nothing unless liabilities are included, too. In addition, there are calls for cryptographic proof that each account is included in the account of assets and liabilities, and signatures that prove custodians have control over wallets.

The biggest consequence of crypto contagion may well be stricter regulation, as lawmakers will undoubtedly move to police the industry more stringently, following what is just the latest scandal to strike the space this year.

Crypto Lacks Investor Protection

Given all these bankruptcies, what happens to users now?

Investor protections in cryptocurrency are not the same as in the traditional finance world. Unlike the collapse of banks around the world during the Great Recession, there will be no government bailouts.

Customers of traditional banks, brokerages and 401(k) plans enjoy the cushion of federally guaranteed insurance. But Federal Deposit Insurance Corp. (FDIC) and Securities Investor Protection Corp. (SIPC) don’t apply to crypto assets.

The lack of this investor protection is what led Bankman-Fried and FTX to stand in as the lender of last resort earlier in the year.

A lot of the uncertainty is drawn from the fact that regulation in the area is still under construction. Digital assets have existed in a gray area of the law ever since Satoshi Nakamoto launched Bitcoin (BTC) in 2009.

What’s Next for BlockFi Customers

BlockFi filing for bankruptcy protection has been widely anticipated after FTX’s demise. The troubled platform suspended withdrawals in the wake of FTX’s collapse earlier this month.

The halting of withdrawals was a similar move pulled by fellow bankrupt lenders, most notably Celsius and Voyager Digital, before they filed for bankruptcy protection.

Now, much like customers of those platforms, BlockFi customers have had their fate taken largely out of hand, and the legal proceedings will likely take years to play out.

Not that anyone would do so, but BlockFi has advised customers not to deposit any more funds.

In a note to clients, BlockFi said: “We encourage clients to maintain their BlockFi app and account at this time. At this time, withdrawals from BlockFi continue to be paused. We also continue to ask clients not to submit any deposits to BlockFi Wallet or interest accounts.”

BlockFi says it has $256.9 million of cash to hand, which is sufficient to finance the costs of the bankruptcy case so that the firm can avoid debtor-in-possession financing.

But the biggest factor for most customers is that withdrawals remain suspended. Unfortunately, that’s something that won’t change anytime soon.

Bottom line

The failure of a crypto platform or any institution that holds your money  is extremely worrying and disconcerting. Crypto prices are volatile enough without dealing with the risk that your funds could be lost in a platform failure. One way that crypto investors can protect themselves is to keep their assets in their own non-custodial wallet.

A crypto wallet may not carry the same earning benefits as a platform like BlockFi was able to offer, and there are risks associated with becoming your own bank. But during what are very turbulent times in crypto, it may mean you can avoid losing your assets due to the failure of an exchange or crypto lending platform.