Crypto Assets in the Voyager Bankruptcy: Can Customers Recover? | Bracewell LLP

The crypto winter has clouded the summer for many Voyager customers. At the start of Voyager’s Chapter 11 filing in July, customer accounts were frozen. Unable to trade their own crypto assets, some frustrated customers rushed to consult with legal counsel. Others began studying bankruptcy law in hopes of finding a legal solution. It wasn’t until late last week, on August 4, that some customers found relief from the crypto storm: Judge Michael Wiles approved Voyager’s motion to allow certain customers who had cash in their accounts to withdraw cash, up to $270 million.

But what about Voyager’s customers whose crypto assets are not included in the court order? Judge Wiles also approved Voyager’s proposed bidding procedures, with certain modifications, and set an accelerated timeline for a sale of virtually all of Voyager’s assets that will conclude with a September 8 sale hearing in the bankruptcy proceedings. Voyager had approximately $1.3 billion worth of crypto assets on the platform as of early July 2022. These assets are likely to be sold with the company by September 8.

Ignoring many customers’ frustrations expressed through a broad letter writing campaign,¹ Voyager is moving forward with the tender process to sell the company. This has been Voyager’s goal from the beginning, despite some Voyager customers still questioning the status of their crypto assets during the August 4 hearing. Voyager has claimed ownership of the customers’ crypto assets with the submission of the most updated user agreement to the court. The latest version says that customers’ crypto assets are under Voyager’s name. Based on this contention, Judge Wiles has approved Voyager’s bid procedure proposal without further questioning the ownership of crypto assets.

While a sale process is a typical event in bankruptcy, this is not a typical bankruptcy. Let’s not forget. This case is about Voyager’s customers, and there is a looming question: can Voyager’s customers recover their crypto assets without going through bankruptcy proceedings?

The answer may be yes. Here’s the argument that Voyager customers can make and the next steps they should consider taking:

• Voyager likely holds private keys to the crypto wallets or from the cryptocurrency transactions for the benefit of Voyager customers
• These private keys do not belong to the bankruptcy estate under section 541(b)(1) of the Bankruptcy Code, which provides that the property of the estate excludes “any power which the debtor may exercise solely for the benefit of an entity other than the debtor”
  • Voyager’s act of holding private keys qualifies for the “debtor’s power” exception because the keys allow Voyager, the holder, to transfer cryptoassets.
  • Voyager exercises this power solely for the benefit of Voyager customers because the security of private keys is critical to customers
  • Unless a Voyager customer has relinquished ownership through its contract with Voyager, Voyager does not benefit from holding the private keys because private keys are used solely to prove ownership and to transfer cryptoassets, the actions of which inherently belong to Voyager customers who legitimate. owners of their crypto assets
• Because Voyager’s act of holding private keys constitutes a power that it exercises solely for the benefit of an entity (the group of Voyager customers), private keys are not the property of Voyager’s bankruptcy estate and should be the property of Voyager customers

If the crypto assets are not the property of the bankruptcy estate, Voyager customers are entitled to recover their returns without seeking relief from a stay of the bankruptcy proceedings. If the court agrees, there are important procedural points to consider given customer identification sensitivity:

• According to Voyager’s latest user agreement, Voyager holds its customers’ crypto assets in omnibus accounts or wallets. What that means is that each customer does not have their own wallet for crypto assets. Therefore, customers must designate a trusted group of individuals or a third party that will be responsible for receiving a small number of private keys for omnibus accounts and either transferring or converting in a manner consistent with the will of the customers, not Voyager’s
• Transfer or conversion of cryptocurrency assets should take place based on pro rata shares of Voyager customers and Voyager should make this information available to the trusted group of individuals or the third party designated by Voyager customers
• Furthermore, transfer of private keys must be done in a confidential manner as any leakage of information could allow non-customers to take ownership of crypto-assets and transfer them before the customer’s representative can access the assets

How do you determine ownership of private keys?

• Ownership of private keys will likely be determined by the contracts signed by Voyager and its customers
• Different Voyager customers signed different contracts with Voyager, so it is important for each customer to consult with legal counsel to review her contract and determine the nature of ownership under the contract
• Based on analogous bankruptcy law, a customer’s ownership status (as opposed to a private key belonging to the estate) is likely to be highly dependent on the amount of control Voyager exercises over such property. When a debtor holds property only for the benefit of a creditor, such property is not property in the debtor’s estate; however, where the debtor uses and/or mixes this property and obtains a high degree of control over the property, it can be determined that the creditor has relinquished his ownership

Based on this argument, what is a Voyager customer’s potential next step?

• Form a group with other Voyager customers who signed similar contracts regarding private key ownership
• Submit individual claims or a claim as a group to recover private keys to crypto assets
• Discuss with your attorney other potential arguments to help recover crypto assets pending the court’s decision on the filed claim(s)

Private key is a key element of blockchain. It may also be key for Voyager customers to protect themselves through the court-approved sale process that is underway.