Thursday, August 11 2022

At the end of June, top 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 cryptocurrencies and showed no signs of paying off the debt.

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

huge stress

And they got in touch with Alameda Research, the trading company co-founded by Sam Bankman-Fried, the billionaire crypto entrepreneur. It’s agreed to provide Voyager with $200 million in cash and a revolving line of credit funded with 15,000 Bitcoin even though Voyager was under enormous pressure.

What happened next is a warning about the dangers of counterparty risk and how cryptocurrencies, despite the promise of blockchain technology, are not immune to the same pitfalls and pitfalls that have long plagued traditional finance.

In 2021, Voyager Digital grossed $415 million in revenue, a 59-fold increase from the previous year. Just five months later, the company, which is based in Jersey City, NJ, and has $1.3 billion in assets, filed for Chapter 11 bankruptcy.

It was the latest casualty of the 2022 cryptocurrency crash. However, the story of how it fell and what comes after can show how the industry can get back up and back on its feet.

three part model

“Debtors are facing a short-term ‘bank run’ due to the downturn in the crypto industry in general and the default on a significant loan made to a third party,” Ehrlich said in the dry language of a bankruptcy filing. . court in New York. “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 entrepreneurs from Wall Street and Silicon Valley, 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 cryptocurrency traders; escrow services that held crypto for clients and paid them with interest; and lend cryptocurrencies, with profits financing the interest payments.

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

The imbalance was bad. Worse yet, Voyager’s newest major counterparty was Three Arrows Capital, the hedge fund that had broken through crypto to amass $10 billion in assets and investments in blue-chip projects like Solana, Avalanche and, most significantly, Terra.

Liquidity problems

In March, Voyager had lent Three Arrows 15,250 Bitcoin and $350 million worth of USDC, a stablecoin, which together were worth around $1 billion. The timing could not have been poorer as cryptocurrencies, along with stocks, fell into a severe bear market.

When Terra’s stablecoin UST suddenly slipped its peg in early May, it set off a chain reaction of failures in its interlocking token ecosystem and killed the $60 billion project. In a statement filed as part of Voyager’s bankruptcyEhrlich said that he and his management team became immediately concerned about Three Arrows’ exposure to Terra. On June 22, Voyager demanded for Three Arrows to pay off $658 million of debt in five days or face default.

He also took advantage of Alameda Research’s $75 million line of credit, but to no avail. “The Alameda line of credit was only a partial solution to the company’s liquidity problems,” Ehrlich said in his statement.

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

To that end, Jake Dermont, head of the financial institutions group at Moelis, and his team solicited 60 potential partners in the investment industry with interests in cryptocurrencies who might be receptive to a strategic deal with Voyager. Twenty of those companies signed confidentiality agreements and reviewed thousands of pages of Voyager’s financial records to assess the company, court records show. Moelis also bought Voyager as a takeover target.

‘The Alameda line of credit was only a partial solution to the company’s liquidity problems.’

Stephen Ehrlich

However, only one potential suitor agreed to make a proposal to finance Voyager outside the scope of bankruptcy proceedings. But it was not accepted. “Potential counterparties raised concerns about the current uncertainty in the cryptocurrency market,” Dermont said in a statement filed with 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 settle outstanding debts. and restructure its operations.

$110 million in cash

Ehrlich insists that Voyager is not going anywhere and that it can continue operations. Voyager has already applied to the court for permission to continue paying its 351 employees and continue to accept some debit card transactions at its own discretion. It holds over $110 million in cash and crypto assets, $350 million of customer money, and $1.3 billion “of crypto assets on its platform.” She hopes to bolster those numbers by recovering some of what Three Arrows owes her.

However, Three Arrows is also bankrupt, and it’s unclear how and if Voyager, which is just one of many creditors, will ever recover a significant portion of the $654 million debt. As for Alameda Research, it is now Voyager’s number one creditor, with $75 million at stake, according to court documents.


Ehrlich notes that he and his team have considerable experience managing market volatility. And the history of Wall Street is littered with cases where one or two companies can break and shake 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 dropped platforms, the focus will shift to what’s next.

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