Voyager bankruptcy: Will customers get the crypto back?

Crypto takes a trip to bankruptcy law

About two months ago, when bitcoin traded around 30% higher than it is now, Coinbase caused a stir by warning in an SEC file that customers could lose cryptocurrencies if the stock market went bankrupt. CEO Brian Armstrong was able to calm things down, assuring customers that Coinbase was not in danger of bankruptcy. Still, the episode raised a difficult question: What happens to a customer’s crypto if the company that holds it goes under? Voyager’s bankruptcy announcement this week will provide a test in the real world.

Voyager’s customers have been banned from their accounts for almost a week. The cryptocurrency broker and lender suspended trading, deposits and withdrawals on July 1, saying it needed time to look for “strategic options” in the midst of a massive market downturn.

• Voyager announced late Tuesday that it had filed for Chapter 11 bankruptcy in New York’s federal court, partly blaming the breach of crypto hedge fund Three Arrows Capital on a loan worth more than $ 650 million from Voyager.
• Voyager CEO Stephen Ehrlich said bankruptcy was the “best way to protect assets on the platform and maximize value for all stakeholders, including customers.” But the company’s public statements and court documents make it clear that it will not be a quick or easy process for customers to get their assets back.
• Under proposed planCrypto holders will receive “a combination of crypto on their account (s), income from [Three Arrows] recovery, ordinary shares in the newly reorganized company and Voyager tokens. “Three Arrows was ordered for liquidation earlier this month, meaning Voyager will have to fight in court with other creditors for part of the capital it pledges to customers.

Cash deposits are also frozen. Voyager said its banking partner, Metropolitan Commercial Bank, has around $ 350 million in customer funds.

• Metropolitan issued a statement on its website stating that “Voyager customer funds … are insured by the FDIC,” up to $ 250,000 per depositor. But the bank added that FDIC insurance is “only available to protect against failure of the Metropolitan Commercial Bank,” not Voyager.
• As writer and economist Frances Coppola wrote, Voyager described some of its products as FDIC-insured in the event of its own failure. It is also not clear whether “depositor” here means individual Voyager customers or Voyager itself, which has an omnibus account in the bank. Voyager said that customers with US dollar deposits will have access after the Metropolitan Commercial Bank’s fraud prevention process is completed.
• Voyager’s promotion of the bank partner’s FDIC insurance may lead to more grief. The FDIC recently issued rules for dealing with false or misleading advertising for the availability of deposit insurance.

Legal experts have long warned that a cryptocurrency bankruptcy would be messy for customers. “What can be safely predicted is that there will be lawsuits, and there will be delays,” Adam Levitin, a law professor at Georgetown University who is studying bankruptcy, told the Wall Street Journal in June.

• Crypto-bankruptcies remain a relatively unknown legal territory. And stock exchanges and other intermediaries lack the federal deposit insurance for banks or the coverage offered by SIPC to member brokers.
• Stockbrokers are required to keep client funds separate from their own accounts, and offer protection in the event of a company’s insolvency. Without a legal precedent for a cryptocurrency bankruptcy, Coinbase’s Armstrong recognized in May that “it is possible, no matter how unlikely, that a court would decide to consider customer funds as part of the company in bankruptcy proceedings”.
• Voyager reported more than 100,000 creditors in its bankruptcy filing, each of which will fight for its share of what is available. This means that customers must go fast to assert their claim, said Daniel Saval, a bankruptcy lawyer at Kobre & Kim. This may include applying for membership in an official creditors’ committee.

Voyager experienced a “run on the bank” according to Ehrlich. It is far from the only company in such problems. Celsius, which similarly offers clients high-interest accounts through a lending business, has been blocking withdrawals for almost a month now and has been in conflict with lawyers over whether to file Chapter 11, according to The Block. Given the current state of the crypto area, “it’s definitely a good time for customers to read the fine print of their user agreements,” Saval said. “How should your property be stored?” These questions will also stimulate the push in Washington to put railings on crypto.

– Ryan Deffenbaugh (e-mail | twitter)

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