Voyager delivers a painful lesson in the dangers of counterparty risk in the bankruptcy drama


In late June, senior executives at Voyager Digital, a cryptocurrency exchange with 3.5 million users, knew they were in deep trouble. Three Arrows Capital, the Singapore-based hedge fund, owed him hundreds of millions in crypto and showed no signs of servicing the debt.

Voyager CEO Stephen Ehrlich and his team have embarked on a mad dash to save their four-year-old company from the kind of bank that is wreaking havoc on the crypto industry. They hired lawyers. They hired a Wall Street investment bank to find a potential savior.

Huge stress

And they reached out to Alameda Research, the trading firm co-founded by billionaire crypto impresario Sam Bankman-Fried. This agreed to provide Voyager with $200 million in cash and a revolving line of credit funded by 15,000 Bitcoins, even though Voyager was under tremendous stress.

What Happened Next is a cautionary tale of the dangers of counterparty risk and how crypto, despite the promise of blockchain technology, is not immune to the same perils and mistakes that have long been around. plagued traditional finance.

In 2021, Voyager Digital achieved $415 million in revenue, a 59x jump from the previous year. Just five months later, the Jersey City, NJ-based company with $1.3 billion in assets filed for Chapter 11 bankruptcy.

It was the latest victim of the cryptocurrency crash of 2022. Yet the story of its downfall and what’s to come can show how the industry can pick itself up and get back on its feet.

Three-part model

“Debtors are facing a short-term ‘race to the bank’ due to the slowdown in the cryptocurrency industry in general and the default of a large third-party loan,” Ehrlich said in the dry language of a bankruptcy filing. New York court. “But the debtors have a viable business and a plan for the future.”

Everything started to change in March. Co-founded in 2018 by Ehrlich and a trio of Wall Street and Silicon Valley entrepreneurs, Voyager was one of many platforms that married the TradFi experience with crypto gaming. The company had a three-part business model: it provided brokerage services to crypto traders; custodial services that held crypto for clients and paid them with interest; and lending cryptocurrencies, with profits funding interest payments.

Voyager was sitting on about $6 billion in outstanding cryptocurrency loans to customers that month, even though the company, which is listed on the Toronto Stock Exchange, had a market capitalization of just $64 million. , according to court filings. Borrowers included Genesis Global Capital, Wintermute Trading and Galaxy Digital. Alameda Research had borrowed $377 million at rates ranging from 1% to 11.5%, according to court documents.

The imbalance was bad. Worse still, Voyager’s most recent major counterparty was Three Arrows Capital, the hedge fund that broke into crypto to raise $10 billion in assets and investments in top projects such as Solana, Avalanche and, above all, Terra.

Liquidity issues

In March, Voyager loaned Three Arrows 15,250 Bitcoin and $350 million of USDC, a stablecoin, which together were worth around $1 billion. The timing couldn’t have been worse as the crypto, as well as stocks, fell in a severe bear market.

When Terra’s stablecoin, UST, suddenly slipped his ankle in early May, it set off a chain reaction of failures in its nested token ecosystem and wiped out the $60 billion project. In a statement filed as part of The bankruptcy of Voyager, Ehrlich said he and his management team immediately became concerned about Three Arrows’ exposure to Terra. June 22, Traveling required Three Arrows pay off $658 million in debt in five days or default.

He also tapped Alameda Research’s line of credit for $75 million, but to no avail. “Alameda’s loan facility was only a partial solution to the company’s liquidity issues,” Ehrlich said in his statement.

Meanwhile, Voyager had hired Kirkland & Ellis, a powerful business law firm, and Moelis & Co., a Wall Street investment bank, to find a white knight who could provide “potential news sources.” cash”.

To that end, Jake Dermont, Head of Financial Institutions Group at Moelis, and his team canvassed 60 potential investment industry partners with interests in cryptocurrency who might be receptive to a strategic deal with Voyager. Twenty of those companies signed confidentiality agreements and scoured thousands of pages of Voyager’s financial records to assess the company, according to the court filing. Moelis also purchased Voyager as an acquisition target.

“Alameda’s loan facility was only a partial solution to the company’s liquidity issues.”

Stephen Ehrlich

Yet only one potential suitor has agreed to make a proposal to finance Voyager outside of bankruptcy proceedings. But it was not accepted. “Potential counterparties have expressed concerns about the current uncertainty in the cryptocurrency market,” Dermont said in a statement filed with the bankruptcy court.

Now Ehrlich, a capital markets veteran and CEO of ETrade Professional Trading from 2002 to 2006, must guide the company through Chapter 11 bankruptcy, a court-supervised process that allows companies to resolve their debts and restructure their operations.

$110 million in cash

Ehrlich insists Voyager is going nowhere and can continue operations. Voyager has already asked the court for permission to continue paying its 351 employees and to continue honoring certain debit card transactions at its discretion. It holds over $110 million in cash and crypto assets, $350 million in client money, and $1.3 billion “in crypto assets on its platform.” He hopes to bolster those numbers by recouping some of what is owed to him by Three Arrows.

Yet Three Arrows itself is also bankrupt, and it’s unclear how and if Voyager, which is just one of many creditors, will ever recoup a significant portion of the $654 million debt. As for Alameda Research, it is now Voyager’s No. 1 creditor, with $75 million at stake, according to court documents.


Ehrlich notes that he and his team have considerable experience in managing market volatility. And Wall Street history is replete with instances where one or two companies can bust and rock the entire market. That this has now happened in crypto is a poignant moment in the evolution of this young industry.

“The eventual implosion of Terra and Three Arrows Capital, and the resulting fallout, created the ‘cryptopaclypse,'” Ehrlich said in the statement.

As Voyager Digital joins the list of fallen platforms, attention will turn to the next one.

Read the original post at the defiant


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