Reckless Crypto Lending, Opaque Operations Paved Voyager Digital’s Path to Bankruptcy

Voyager Digital

A $500 million line of credit couldn’t save crypto brokerage 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’” after a borrower defaulted on a $650 million loan.

While the filing mentioned the broader crash of the cryptocurrency market as well the inability of crypto hedge fund Three Arrows Capital — itself in bankruptcy — to repay its debt, the numbers show a bigger problem that has been on display in other crypto lenders hit by the default.

Specifically, Voyager loaned out a staggering amount of its capital to a single borrower. While it pitched brokerage services with trading on 100 cryptocurrencies to retail customers, a big part of its business was Voyager Earn, which offered crypto owners interest rates as high as 12% for depositing digital assets that would be lent out to other borrowers.

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

That means that the amount it loaned Three Arrows was equal to more than 10% of its liabilities and 35% of the funds it had on hand.

When that one customer went belly up, the loss was so large that it started a 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 gave the line of credit and is owed $75 million.

Wait in Line

That type of lending operation has been in the Securities and Exchange Commission’s (SEC) crosshairs for months. It recently joined a group of state regulators in suing BlockFi — another crypto lend that recently halted withdrawals after Three Arrows defaulted on a $250 million loan. The firm settled with the SEC earlier this year for $100 million. It 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 a decentralized finance (DeFi) token.

What’s notable is that Three Arrows was reportedly not transparent about what it was investing in, but received huge loans from a number of companies. And this is a problem that goes beyond just 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 that lend to retail customers generally require a crypto deposit of 125% to 150% of the sum borrowed, which is liquidated if the collateral falls too fast.

Neither Voyager nor BlockFi had anything like that kind of collateral from their big lending clients, and had backed one so heavily that it’s failure was enough to force them to halt withdrawals after raising a big enough panic to cause a run.

With some reason, as depositors and customers with funds on the platform are unsecured creditors.

In a statement announcing its bankruptcy filing, CEO Steve Ehrlich said, “Voyager’s platform was built to empower investors by providing access to crypto asset trading with simplicity, speed, liquidity, and transparency.”

While he’s not wrong that “the prolonged volatility and contagion in the crypto markets over the past few months, and the default of Three Arrows Capital (‘3AC’) on a loan” was behind its Chapter 11 filing, it shows why the SEC and other regulators have been focused so heavily on crypto lending projects, which are pitched in much the same way bank deposits are, but have nothing like those protections.

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

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

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