Voyager: The Convergence of Chapter 11 and the Crypto Winter | Bracewell LLP

Voyager Digital Assets, Inc., a leading cryptocurrency brokerage and lending platform, filed for Chapter 11 bankruptcy protection on July 5, 2022 in the Southern District of New York following a recent financial crisis that affected the crypto industry, which investors call “the crypto.” winter.” The filing was followed by the Chapter 11 bankruptcy of Celsius Networks. While the situation is fluid, these two filings could be the beginning of a series of bankruptcies by major cryptocurrency companies. As global financial markets deteriorate and investors pull their assets — especially in the riskier field of cryptocurrency – could force more companies to seek refuge in bankruptcy, raising new issues for courts tasked with distributing digital assets to creditors.

Because Voyager is the first cryptocurrency company to file for Chapter 11, new law will quickly develop in the bankruptcy proceedings that will have a lasting impact on the cryptocurrency industry, and winners and losers will emerge based on the actions parties take now in these uncertain times. Here at Bracewell, we have extensive experience in restructuring representing debtors, shareholders, creditors, ad hoc groups, creditor committees, asset buyers and other distressed investors. We have combined our restructuring and crypto expertise to form a team of attorneys focused on the issues stakeholders should know about to protect their interests and take advantage of the current market both in and out of bankruptcy.

According to historical balance sheet data, Voyager’s financial struggles were somewhat abrupt and stand in stark contrast to previous years’ results. Voyager had a strong fiscal year in 2021, largely due to an increase in customer deposits that the company used to make loans to counterparties in the crypto sector. These intra-industry loans are common in the crypto world, and in good times were used to pass on any interest on the loans directly to the customers. But as the underlying value of digital assets fell in recent months and customers withdrew their assets, counterparties defaulted on loans, sparking a sweeping financial crisis.

In a recent press release, Voyager cited general market conditions as well as a defaulted $650 million loan to Three Arrows Capital — a crypto hedge fund that has recently struggled and is itself undergoing insolvency proceedings in the British Virgin Islands and a result of Chapter 15 bankruptcy in the Southern District of New York . Voyager CEO Stephen Ehrlich expressed high hopes for the company’s future, but noted that Voyager’s goal of a “comprehensive reorganization is the best way to protect platform assets and maximize value for all stakeholders, including customers.”

Voyager recently proposed a Chapter 11 plan of reorganization to emerge from bankruptcy, along with a potential sale process. Through the proposed plan, Voyager seeks to distribute a combination of crypto held on the Voyager platform, shares of the newly reorganized company, Voyager tokens, and the proceeds of the Three Arrows recovery to customers. The company revealed that it has $110 million in cash and crypto assets on hand, as well as $1.3 billion in crypto assets on its platform. It also has more than $350 million in cash in a For Benefit of Customers account at Metropolitan Commercial Bank. Unlike customers’ digital assets on the Voyager platform, which the company considers the property of the bankruptcy estate — a position likely to be hotly contested in the proceedings — Voyager has promised immediate repayment of $350 million to customers upon completion of a reconciliation. and fraud prevention process by the bank. Despite these assets, as an unsecured creditor in the Three Arrows bankruptcy, Voyager’s successful reorganization and plan confirmation will ultimately depend on the amount it recovers from the ongoing Three Arrows liquidation.

Voyager has announced that it is exploring all options to maximize customer recovery, including a two-track restructuring process that could lead to a sale of the company rather than distribution under the proposed plan. On July 21, Voyager submitted a bid proposal requesting to initiate a confidential bidding process prior to confirmation of the plan and has engaged with more than 80 interested parties. While it is possible that a winning bid would supersede the proposed distribution of assets to customers, Voyager makes clear that its preference is for a sale that can be achieved through the proposed plan.

The Voyager bankruptcy raises new questions regarding the distribution of digital assets under the bankruptcy code. During the Voyager hearing on the first day, the court questioned whether digital assets on the Voyager platform should be considered property of the estate, and thus subject to distribution to unsecured creditors, or property of Voyager customers themselves. The answers to these new questions are likely to come soon, as the Southern District of New York wades into the substance of the Voyager and Celsius Network bankruptcies. The answers will ultimately determine the success of the reorganization of these, and other companies forced into bankruptcy by the crypto winter.