Charting New (and Familiar) Territory: Voyager Crypto Bankruptcy | Mintz – Bankruptcy and Restructuring Considerations

Voyager Digital Assets Inc., along with two of its affiliates, filed for bankruptcy in the Southern District of New York on July 5, 2022. a Singaporean cryptocurrency hedge fund (which borrowed $ 350 million and $ 15,250 Bitcoins from Voyager). While “crypto” is a newcomer to the US bankruptcy system, the known outlines of insolvency law will be at stake in Voyager bankruptcy with many new questions that have not yet been answered.

Cryptocurrency

Cryptocurrency is a digital means of storing assets using blockchain technology. Essentially, cryptocurrencies are records of transactions that have taken place on a string of data codes known as the blockchain. Each crypto “coin” is part of a blockchain which means a confirmed transaction. The inventor of bitcoin defined it as “a chain of digital signatures. Each owner transfers bitcoin to the next by digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin. A payee can verify the signatures of to confirm the ownership chain. “¹ And while every bitcoin transaction is publicly visible, the parties to the transaction can remain anonymous. Various forms of cryptocurrency, from Bitcoin to Etherum to Solana, are widely available on many platforms. However Voyager Bankruptcy appears to be largely the result of contagion from a specific “stablecoin” that was (in theory) backed by – or “linked to” – actual currency.

Voyager Digital’s business model

At first glance, Voyager’s business was typical of many financial services companies, which provided their customers with (i) brokerage services, (ii) custodian services and (iii) lending services. At the time of filing, Voyager Digital had over 3.5 million customers.

Voyager’s brokerage services provided customers with a platform to facilitate trading in cryptocurrencies across a range of cryptocurrency exchanges. In the same way as a traditional trading table, Voyager acted as an intermediary between buyers and sellers of cryptocurrencies in a number of crypto markets or exchanges.

Voyager’s custodian services allowed customers to “deposit” cryptocurrency on the Voyager platform, and in return earn interest on the deposit. The interest form was primarily paid either in (i) PIK interest, ie interest paid in the form of bitcoin deposited, (ii) Voyager’s own cryptocurrency which provided further account improvements, or (iii) an “deposited” value at the time of deposit which will be available only after a certain period of time.

Voyager’s lending services allowed customers to “borrow” bitcoin (deposited by customers) at pre-negotiated interest rates. The repaid interest was then used to pay, among other things, interest to customers who deposited bitcoin on Voyager’s platform.

“Cryptopocalypse”

The months leading up to Voyager Bankruptcies were marked by a wave of economic downturn in the cryptocurrency industry, aptly called the “Cryptopocalypse.” From November 2021 to June 2022, the market value of cryptocurrencies fell from $ 2.9 trillion to $ 1 trillion. As a result, two major players in the cryptosphere (and key players in Voyager’s business) collapsed – Terraform Labs and Three Arrows Capital.

Terraform Labs issued Luna, a traditional cryptocurrency that recorded transactions on the Terra blockchain. Terraform Labs also developed TerraUSD, a stable currency that in theory was linked to the value of the US dollar and thus historically traded on Terra at $ 1.00. The value of TerraUSD was the standard for valuing Luna cryptocurrencies – when a TerraUSD coin was minted, a similar Luna coin was also minted. Thus, users on the Terra blockchain will increase the price of Luna coins by minting and trading TerraUSD and Luna coins. If the value of either TerraUSD or Luna coins fell below $ 1.00, Terra blockchain users would trade the coins for $ 1.00 worth of the option.

In May 2022, TerraUSD was sold for over $ 2 billion, causing a general panic among Terra blockchain users. As a result, TerraUSD’s trading price fell to $ 0.15, as opposed to $ 1.00. Luna suffered a worse fate, trading below $ 0.01.

Three Arrows Capital, a Singapore crypto-hedge fund, was strongly rooted in the Luna cryptocurrency, with over $ 200 million invested in Luna coins. As a result of Cryptopocalypse, the value of the fund’s Luna portfolio evaporated, leading to the company initiating liquidation proceedings in the British Virgin Islands on 27 June 2022. To date, the estimated value of Three Arrows Capital is less than $ 5 million; a significant problem for Voyager, which had lent $ 350 million and $ 15,250 Bitcoins (for a total loan valued at more than $ 650 million) to Three Arrows Capital.

The bankruptcy

The negative impact of the Three Arrow Capital liquidation procedure was almost immediate for Voyager. In the latter part of June 2022, the company began to engage in a marketing process to either sell all the assets or raise capital. On June 23, 2022, Voyager was forced to limit withdrawals from the platform from $ 25,000 to $ 10,000. Then, on July 1, 2022, the company suspended all trading, deposits and withdrawals. In its press release announcing the shutdown, Voyager announced that it had $ 658 million in assets, $ 355 million in customer cash and $ 168 million in cryptocurrency.

Just one week before the bankruptcy, on June 22, 2022, Voyager, in an attempt to find stabilizing liquidity, entered into a $ 500 million revolving credit facility with Alameda Ventures Ltd., consisting of $ 200 million in cash and 15,000 Bitcoins.

On July 5, Voyager initiated (i) a Chapter 11 proceeding and (ii) a Chapter 15 proceeding for its Canadian affiliates in bankruptcy proceedings in the Southern District of New York.

The company announced that it would embark on a “double-track” restructuring process – which would result in either (x) a sale of the company or (y) issuance of equity in the reorganized company to the customers. Voyager expects to fund a reorganization plan with “(a) cash, (b) coins, (c) Voyager tokens, (d) Three Arrows Capital Recovery and (e) New Common Stock.” Essentially, this “placeholder” plan is no more than a summary of the typical options available to any bankruptcy entity.

Considerations

In many ways is Voyager Bankruptcy is to chart the worn path to Chapter 11 reorganization by using the various tools in the restructuring toolbox (ie the automatic stay, a potential debt for share exchange, a potential free and clear sale). Many routine bankruptcy issues are easily apparent early in these cases: (a) whether and to what extent there is preferential exposure for withdrawals made during the 90 days leading up to bankruptcy; (b) whether and to what extent there are claims against the company’s management as a result of Voyager’s prepayment transactions; and (c) whether and to what extent customers are secured to the extent that the cryptocurrencies deposited on Voyager’s platform.

However, Voyager’s primary business – cryptocurrency – and the spread of the cryptocurrency world are mapping unknown territory that has confused investors, regulators and laymen since the entry of cryptocurrency into the public sphere. Given the volatile nature of cryptocurrency, this bankruptcy is likely to set a precedent in terms of valuation of digital assets, related claims and the ability to confirm a cryptocurrency plan as a means of implementation. As debtors begin to confirm a plan, new issues surrounding the identification and labeling of Voyager’s creditors, the adequacy of the company’s revelation of the reorganization plan, and a myriad of other issues will unfold.² And as the bankruptcy court questioned at the “first day hearing”, whether the crypto held by the debtor really constitutes “the estate’s property” will ultimately determine the path of bankruptcy and Voyager’s prospects for successful reorganization.

¹ Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash Systemavailable in

² From the date of this publication, another cryptocurrency lending company, Celsius Network. Chapter 11 sought relief in bankruptcy proceedings for the Southern District of New York. Celsius Network is represented by the same lawyers as Voyager.

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