Voyager Digital crypto brokerage firm is under siege. The beleaguered firm filed for Chapter 11 bankruptcy protection, becoming the latest victim of the chaos dominating the digital assets market. Voyager launched its bankruptcy proceedings in the U.S. Bankruptcy Court for the Southern District of New York on July 5, based on an official filing.
Voyager is a crypto company that provides broking services. It finds the best prices for cryptos that clients want to buy or sell and borrows digital assets from customers in exchange for yields that go up to 12% and then lends these assets out.
The professor of finance at the University of Sussex business school, Carol Alexander, believes that Voyager’s troubles are a part of a cryptocurrency credit crisis. However, Carol argued that it was “not a bad thing at this stage”. She added:
“During the latest bitcoin bubble, firms offering unsustainable yields have proliferated too rapidly. The shakedown we are witnessing now is welcomed by most authentic advocates of the digital asset ecosystem.”
Their filing lists assets of $1 billion to $10 billion and liabilities valued within the same range. In a statement, Voyager Digital said it has nearly $1.3 billion of crypto on its platform and holds at least $350 million in cash on behalf of clients at New York’s Metropolitan Commercial Bank.
The company suffered massive losses from its exposure to Three Arrows Capital (3AC) cryptocurrency hedge fund that collapsed in the past week after it defaulted on loans from several companies in the sector – including around $650 million from Voyager.
Voyager CEO Stephen Ehrlich commented in a tweet on July 6:
“We strongly believe in the future of the industry but the prolonged volatility in the crypto markets, and the default of Three Arrows Capital, require us to take this decisive action.”
The Toronto-listed firm’s shares have lost about 98% of their value since the start of this year. For now, Voyager says that it is still pursuing the recovery of funds from Three Arrows Capital (3AC), including through court-supervised proceedings happening in New York and the British Virgin Islands.
Recently, Voyager suspended all withdrawals, deposits, and trading on its platform as a result of the ‘current market conditions.’ Ehrlich at the time stated that his company was looking for some more time to explore “strategic alternatives with various interested parties.”
A few other firms, including Babel Finance, Celsius, and Vauld have implemented similar measures. On July 5, Vauld received a takeover offer from Nexo, a rival company, after it suspended its services. Currently, the entire crypto market is grappling with a severe liquidity crisis as platforms strive to meet a flood of withdrawals from clients amid a steep drop in digital currency prices.
These drops in crypto started with a widespread plunge in risky assets as the Federal Reserve embarked on monetary tightening and accelerated after the collapse of Terra, the supposed stablecoin venture that was valued at about $60 billion at its peak.
Bitcoin, the biggest crypto, had its worst month ever in June, losing 38%. Investors are now bracing for a much longer downturn in digital currencies referred to as a ‘crypto winter.’
Three Arrows Capital (3AC) Saga
On July 5, Voyager Digital filed for bankruptcy in the wake of the major cryptocurrency hedge fund Three Arrows Capital (3AC). Voyager’s Chapter 11 filing came a few days after 3AC filed for bankruptcy and barely a week after 3AC defaulted on a loan that was offered by Voyager.
Voyager Digital said in a press release that it has nearly $1.3 billion worth of crypto assets, $110 million in cash and crypto on hand, and the $350 million it has in an FBO (For-Benefit-Of) account for clients. It also confirmed that 3AC still owes over $650 million.
Ehrlich blames the firm’s financial challenges on “the prolonged volatility and contagion in the crypto markets” and 3AC’s failure to repay its debt. He added:
“The chapter 11 process provides an efficient and equitable mechanism to maximize recovery.”
Companies like Voyager Digital go for the Chapter 11 filing when they want to reorganize their debt while remaining operational.
Voyager outlined its proposed course of action in a press release, saying that it will offer clients “a combination” of the company shares, the recovered funds from 3AC, the crypto held in their accounts, and Voyager tokens. The Voyager tokens are currently valued at about 21 cents each.
The firm explained that clients who currently have USD deposits in their accounts will just regain access “after reconciliation and fraud prevention process is completed with Metropolitan Commercial Bank.” Nonetheless, this plan has to be approved by the court.
Voyager Digital suspended all withdrawals, deposits, and trading services in the past week after it announced that 3AC failed to repay its loan. The billionaire CEO of trading firms Alameda Research and FTX, Sam Bankman-Fried, said in June that he had extended a $500 million line of credit to Voyager trying to help it cope with the turbulent market.
Notably, Bankman-Fried’s Alameda Research had also invested $75 million in Voyager in 2021. That investment is what the Chapter 11 filing lists as the firm’s largest unsecured claim.
The crypto crash seems to be revealing just how intertwined the crypto companies are, with the transitory shutdown of crypto lenders like Babel Finance and Celsius preceding 3AC and Voyager Digital’s bankruptcy filings. Earlier in the week, cryptocurrency lending and trading startup Vauld also halted all transactions. However, we are yet to see how far the fallout will reach eventually.
The Voyager Digital Restructuring Plan
Voyager is confident that the bankruptcy proceedings would enable it to implement a restructuring procedure to ensure that the customers are reimbursed. If everything goes as planned, users would get a combination of cryptos in their accounts. They also expect to get some of the money recovered from 3AC, Voyager tokens, and shares of the entirely reorganized firm.
The customers with US dollar deposits are expected to regain access to their funds after a reconciliation and fraud prevention process with Metropolitan Commercial Bank is finalized, according to Voyager Digital.
Alameda Research was listed as Voyager’s biggest creditor in the bankruptcy filing with Bankman-Fried extending a bigger line of credit in June. The FTX CEO has become a lender of last resort for those who are troubled in the crypto industry. Recently, he agreed to a deal giving FTX the option to purchase crypto lending firm BlockFi for up to $240 million. That is a dramatic drawdown from the $3 billion it was last privately valued at.
Some people have likened Bankman-Fried’s efforts to the role that was played by famous banker John Pierpont or J.P. Morgan in rescuing the Wall Street lenders from collapse after a series of bank runs called the Panic of 1907 that preceded the formation of the Federal Reserve.
Toronto Stock Exchange Suspended Voyager Digital Trading
Voyager shares lost around 27% in the five trading days that resulted in the announcement of its bankruptcy. The crypto trading firm was then suspended from trading on the Toronto Stock Exchange (TSX) on July 6 to give Canadian regulators and legislators some time to review the firm’s listing requirements.
Trading stopped on Wednesday morning after the cryptocurrency broker decided to file for Chapter 11 bankruptcy. Notably, Voyager Digital LLC and Voyager Digital Holdings, Voyager Digital’s affiliates in the Southern District of New York also filed for bankruptcy on July 5.
At the time it filed for bankruptcy, Voyager had a market cap of around $51 million. The company saw its share price plunge by almost 27% to reach $.26 in the five days that led to the delisting decision. Its shares are now down by about 99% since it peaked at about $27 in March 2021.
A day before VYGVF was delisted, its trading volume surged by more than thrice its average rate, to reach 5 million compared with 1.5 million, according to the official data published by Yahoo Finance.
Stephen Ehrlich, Voyager CEO said that he believes in the future of the crypto sector. However, he cited volatility in the crypto space and the default of 3AC as the reasons that have pushed Voyager Digital to take this decisive stern action.
Voyagers, today we began a voluntary financial restructuring process to protect assets on the platform, maximize value for all stakeholders, especially customers, and emerge as a stronger company. Voyager will continue operating throughout.https://t.co/TxlO4eua8E
— Stephen Ehrlich (@Ehrls15) July 6, 2022
In June, Voyager said that it had $661 million in exposure to 3AC that has already become insolvent after it failed to meet margin calls from most investors. Based on the preliminary figures availed in a market update, Voyager had over $1.12 billion in crypto assets loaned and it held $685 million in crypto assets.
In its July 1 statement, the company decided to suspend withdrawals, trading, deposits, and loyalty rewards for its clients. Ehrlich commented:
“This was a tremendously difficult decision, but we believe it is the right one given current market conditions. This decision gives us additional time to continue exploring strategic alternatives with various interested parties while preserving the value of the Voyager platform.”