Voyager Digital’s road to bankruptcy

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A $500 million line of credit failed to save crypto broker Voyager Digital from bankruptcy.

The crypto lender, which has 3.5 million active customers, filed for Chapter 11 bankruptcy protection on July 5, telling the Bankruptcy Court for the Southern District of New York that it was “facing a short-term ‘run on the bank’.” The borrower has defaulted on a $650 million loan.

While the filing mentioned the broader collapse in the cryptocurrency market, as well as the inability of crypto hedge fund Three Arrows Capital — itself in bankruptcy — to repay its debt, the numbers reveal a larger problem that has surfaced at other crypto lenders caught up in the crisis are affected Originally.

Notably, Voyager has lent a staggering amount of its capital to a single borrower. While it offered retail clients brokerage services trading 100 cryptocurrencies, a large part of its business was Voyager Earn, which offered crypto owners interest rates of up to 12% on escrow of digital assets that would be lent to other borrowers.

While the filing had $5.7 billion in liabilities as of late March, Voyager told the court it had $1.3 billion in crypto assets on its platform and $350 million in the bank, where it held customer deposits, as well as $110 million in cash and its own crypto assets — which will be used to fund day-to-day operations during the Chapter 11 restructuring.

That means the amount it loaned to Three Arrows was more than 10% of its liabilities and 35% of available funds.

When that one client went down the drain, the loss was so great that it caused panic that not even a $500 million line of credit from crypto’s richest man, Sam Bankman-Fried, the CEO of the FTX exchange and crypto investment firm Alameda Research, which provided the line of credit and is owed $75 million.

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This type of lending has been in the crosshairs of the Securities and Exchange Commission (SEC) for months. It recently joined a group of state regulators suing BlockFi — another crypto loan company that recently halted withdrawals after Three Arrows defaulted on a $250 million loan. The company settled $100 million with the SEC earlier this year. It was agreed to be acquired by FTX for $240 million on Friday.

Like Voyager, BlockFi was hit when Three Arrows lost huge sums invested in a risky decentralized finance (DeFi) token.

Notably, Three Arrows was reportedly not transparent about what it was investing in, but received huge loans from a number of companies. And this is an issue that goes beyond the one hedge fund and its lenders, a number of industry insiders have said recently, applying it to VC investors as well.

The crypto lending-borrowing protocols like Voyager Earn, which lend to retail customers, generally require a crypto deposit of 125% to 150% of the amount borrowed, which is liquidated if collateral falls too quickly.

Neither Voyager nor BlockFi had anything like that kind of collateral from their big lending customers and had backed one so strongly that the failure was enough to force them to halt withdrawals after creating a panic large enough to cause trigger a rush.

For some reason as depositors and clients with funds on the platform are unsecured creditors.

In a statement announcing the bankruptcy filing, CEO Steve Ehrlich said, “Voyager’s platform is designed to empower investors by providing easy, fast, liquid and transparent access to crypto asset trading.”

While he’s not wrong that “the continued volatility and contagion in crypto markets over the past few months and Three Arrows Capital’s (‘3AC’) default on a loan” were behind his Chapter 11 filing, it shows why the SEC and other regulators have focused so heavily on crypto lending projects that are similar to bank deposits but offer nothing like them.

While the bankruptcy plan calls for customers to receive a combination of cryptocurrency in their accounts, a share of all funds retrieved from Three Arrows Capital, shares in the reorganized company, and Voyager’s own cryptocurrency tokens, it says customers will have funds deposited with the Metropolitan Commercial Bank have access to them again.

But it’s worth noting that while the bank’s funds are federally insured, that only applies to its default, not Voyager’s.

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