Voyager Digital Assets Inc., along with two of its affiliates, filed bankruptcy petitions in the Southern District of New York on July 5, 2022. The filing is significant — it follows months of extreme downturn in the cryptocurrency that led to the collapse of Three Arrows Capital, a Singaporean cryptocurrency hedge fund (which borrowed $350 million and 15,250 Bitcoin from Voyager). While “crypto” is a relative newcomer to the US bankruptcy system, the familiar contours of insolvency law will be in play in the Traveler bankruptcy with many new unanswered questions.

Cryptocurrency

Cryptocurrency is a digital way of storing value using blockchain technology. Essentially, cryptocurrencies are records of transactions that took place on a string of computer code known as a blockchain. Each crypto “coin” is a part of the blockchain signifying a verified 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 next owner’s public key and appending them to the end of the coin. A beneficiary can verify signatures to verify the chain of ownership.¹ And, although 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, the Traveler the bankruptcy appears to be largely the result of contagion from a specific “stablecoin” that was (in theory) backed by – or “tied to” – real currency.

Voyager Digital business model

At first glance, Voyager’s business was typical of many financial services companies, providing its clients with (i) brokerage services, (ii) custodial services and (iii) loan services. At the time of filing, Voyager Digital had over 3.5 million customers.

Voyager’s brokerage services have provided its clients with a platform to facilitate cryptocurrency trading on a variety of cryptocurrency exchanges. Much like a traditional trading desk, Voyager served as an intermediary between buyers and sellers of cryptocurrency on a variety of crypto markets or exchanges.

Voyager’s custodial services allowed customers to “deposit” cryptocurrency into the Voyager platform and, in return, earn interest on the deposit. The form of interest was mostly paid either (i) in PIK interest, i.e. interest paid in the form of deposited bitcoin, (ii) Voyager’s own cryptocurrency which provided account enhancements additional, or (iii) a “staked” value at the time of deposit which would only be available after a specified period of time.

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

The “Cryptopocalypse”

The months preceding the Traveler bankruptcy were marked by a wave of economic decline in the cryptocurrency industry, aptly dubbed 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 crypto sphere (and key players in Voyager’s business) – Terraform Labs and Three Arrows Capital – collapsed.

Terraform Labs released Luna, a traditional cryptocurrency that recorded transactions on the Terra blockchain. Terraform Labs also developed TerraUSD, a stablecoin which, in theory, was pegged to the value of the US dollar and therefore historically traded on Terra at $1.00. The value of TerraUSD was the standard for the valuation of Luna crypto coins – when a TerraUSD coin was minted, a corresponding Luna coin was also minted. Thus, Terra blockchain users would bolster the price of Luna coins by minting and trading TerraUSD and Luna coins. If the value of TerraUSD or Luna coins fell below $1.00, Terra blockchain users would exchange the coins for $1.00 of the alternative.

In May 2022, over $2 billion worth of TerraUSD was sold, causing widespread panic among Terra blockchain users. As a result, the trading price of TerraUSD dropped to $0.15 from $1.00. Luna suffered a worse fate, trading below $0.01.

Three Arrows Capital, a Singaporean crypto hedge fund, was heavily entrenched in the Luna crypto coin, with over $200 million invested in Luna coins. Following the Cryptopocalypse, the value of the fund’s Luna holdings evaporated, leading the company to initiate liquidation proceedings in the British Virgin Islands on June 27, 2022. As of today, the estimated value of Three Arrows Capital is less than $5 million; a significant issue for Voyager, which had lent $350 million and 15,250 Bitcoin (for a total loan valued at over $650 million) to Three Arrows Capital.

Bankruptcy

The negative impact of Three Arrow Capital’s liquidation proceedings 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 of its assets or raise capital. On June 23, 2022, Voyager was forced to limit withdrawals from its 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 said it had $658 million in assets, $355 million in customer cash, and $168 million in cryptocurrency.

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

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

The company has announced that it will embark on a “dual-track” restructuring process – which will result in either (X) a sale of the business or (there) the issue of shares of the reorganized company to its customers. Voyager plans to fund a reorganization plan with “(a) cash, (b) coins, (c) Voyager tokens, (d) three-arrow capital recovery, and (e) new common stock” . Essentially, this “placeholder” plan is nothing more than a summary of the typical options available to any bankrupt entity.

Considerations

In many ways, the Traveler bankruptcy charts the well-worn path of Chapter 11 reorganization using the various tools of the restructuring toolkit (i.e. automatic stay, possible debt-for-equity swap, possible free sale and clear). Many routine bankruptcy issues are readily apparent from the outset of such cases: (a) whether and to what extent there is preferential exposure for withdrawals made within 90 days of bankruptcy; (b) whether and to what extent are there any claims against company management arising from transactions prior to Voyager’s petition; and (c) whether and to what extent Customers are secure insofar as they have deposited Cryptocurrencies on the Voyager Platform.

However, Voyager’s core business – cryptocurrency – and contagion in the crypto world chart uncharted territory that has baffled investors, regulators and laypeople alike since cryptocurrency entered the sphere. public. Given the volatile nature of cryptocurrency, this bankruptcy is likely to set a precedent for digital asset valuation, related claims, and the ability to confirm a plan with cryptocurrency as a means of stake. implemented. As debtors move to confirm a plan, new questions about identifying and locating Voyager’s creditor constituencies, the adequacy of the company’s disclosure of its reorganization plan, and a myriad of other questions arise. will take place.² And, as the bankruptcy court asked in the “first day of hearing,” whether the crypto held by the debtor actually constitutes “estate property” will ultimately determine the trajectory. of the bankruptcy and the prospects of success of the reorganization of Voyager.

¹ Satoshi Nakamoto, Bitcoin: a peer-to-peer electronic payment systemavailable at https://www.bitcoin.com/bitcoin.pdf.

² As of the date of this publication, another crypto credit company, Celsius Network. filed for Chapter 11 relief in the bankruptcy court for the Southern District of New York. Celsius Network is represented by the same attorneys as Voyager.

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