Post Authored By: Jake Leahy
Early last month, Voyager Digital Assets, Inc. charted its own course. That is, the cryptocurrency platform filed a voluntary Chapter 11 Bankruptcy petition in the Southern District of New York. It’s the first bankruptcy of its kind, with cryptocurrency exchanges, Bitcoin backed debt, and an entirely new category of assets to end up in United States Bankruptcy Court.
Notably, Voyager indicates its bankruptcy filing is directly caused by the downturn in the cryptocurrency market generally. As it is the first filing of its kind, others in the industry may soon follow suit. While this case is likely to drag on for years, the proceedings are nonetheless likely to provide guidance for other crypto companies as they ponder consolidation or restructuring through bankruptcy.
The company allows consumers to buy and sell cryptocurrency on their platform; according to the front page of its website, it offers “100+ digital assets Commission-free.” The website now includes an additional, more cryptic message, stating that, “transactions on our mobile and web platforms are currently paused,” and provides a link to more information about the organization’s restructuring process.
While one might assume the company is like a bank, as consumers typically input dollars in exchange for digital assets, the actual picture is more unclear. There are numerous questions about the corporate structure, holdings, liabilities, and similar types of issues which will prove to be critical in its restructuring conversations.
The most pressing question for consumers and creditors alike will be whether the digital assets in consumer accounts are retained by Voyager, or if consumers retain ownership of their own holdings. While the relationship largely appears to be a depository one on its surface, the explicit terms of the Voyager user agreement state that upon deposit, the assets are actually owned by Voyager, not by the consumers. Even for those consumers who may treat the platform as a bank.
While the company’s filings blame the cryptocurrency collapse specifically for recent financial distress, much of the proceedings can be traced back to the recent Three Arrows Capital liquidation case in the British Virgin Islands. Three Arrows Capital is a cryptocurrency hedge fund which lost millions with the collapse of certain coins, specifically Luna coin. Voyager had lent Arrows Capital hundreds of millions of dollars and over ten thousand Bitcoin to Three Arrows.
Soon after Three Arrows Capital filed, Voyager attempted to raise additional funding, to no avail.
While new questions are sure to arise throughout the proceedings, the first is what sort of security do cryptocurrency investors have in holdings on the platform? Will they be treated as unsecured creditors, or more like depository holders?
Another additional layer that is likely to cloud the litigation is the recent cease and desist Voyager received from the Federal Reserve. Late last week, the Federal Reserve issued a press release about the letter that was sent to Voyager, alleging that it wrongfully led consumers to believe that their funds were FDIC insured, when in fact, they were not.
While Voyager itself maintains a Bank in New York City at Metropolitan Commercial Bank, the funds held by customers with Voyager are not FDIC insured. Among the potentially misleading suggestions by Voyager, according to the Federal Reserve, is that its customers would be insured “against the failure of Voyager itself.”
While it remains to be seen whether the alleged false or misleading statements amount to anything in the bankruptcy dispute, the FDIC issue surely adds an additional wrinkle to the fold.
As cryptocurrency and related companies have seen massive growth in recent years, it was only a matter of time before some of them end up in bankruptcy courts. As the laws of digital assets continue to evolve, Voyager is likely to chart the path forward, for better or for worse, for cryptocurrency companies where bankruptcy might be in the cards.
About the Author:
Jake A. Leahy is a J.D. Candidate at the University of Illinois Chicago School of Law, where he is a member of the Trial Advocacy & Dispute Resolution program, President of the Estate Planning Student Society, and Vice President of the Celtic Law Association. He also is a member and vice president of the District 106 Board of Education in Lake County, and he is the Publisher & Editor of the Chicago Federal Law Blog.