Bankrupt Voyager’s Crypto Customers Face Long Slog To Get Back Funds

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Voyager Digital
,
a major cryptocurrency lender, is throwing itself into bankruptcy. Its depositors are about to find out how messy, long, and costly that process can be.

Voyager (ticker: VOYG.CA) was part of a broad ecosystem of companies that took crypto deposits and paid high interest rates to customers. To earn that yield, Voyager lent the tokens to other investors at even higher rates.

But amid the turmoil that has struck the broader markets in recent weeks, some big crypto borrowers, such as the hedge fund Three Arrows Capital (3AC), stopped paying their debts. Depositors have clamored to get their funds back.

Last Friday, Voyager froze withdrawal requests. And on Tuesday evening, the company filed for Chapter 11 bankruptcy protection, describing itself as a victim of 3AC’s own bankruptcy and the general collapse in prices of cryptocurrencies such as

Bitcoin
.
On Tuesday, before the filing, Voyager stock traded at 34 cents, down 99% from its November high.

The big question now is what will happen to Voyager’s depositors, many of whom likely didn’t understand what risks they were taking by holding funds with the company. Voyager on Wednesday said it has $1.3 billion of crypto on its platform, as well as a bank account holding $350 million in cash for customers. The company says it is owed more than $650 million by 3AC, whose attorneys said in a filing last week that the company had collapsed “in the wake of extreme fluctuations in cryptocurrency markets.”.

Voyager’s bankruptcy filing proposed that customers should get some of their crypto back, proceeds from its efforts to recoup money from 3AC, equity in Voyager after it exits bankruptcy, and “Voyager” tokens. It also issued a press release suggesting that customers who had U.S. dollars held on the platform could get their funds back more quickly, “after a reconciliation and fraud prevention process is completed.”

“We strongly believe in the future of the industry but the prolonged volatility in the crypto markets, and the default of Three Arrows Capital, require us to take this decisive action,” said Voyager CEO Stephen Ehrlich in a tweet announcing the bankruptcy.

In reality, depositors could face a haircut and likely will be waiting months, or even years, to get some of their funds back, says Cornell Law School professor Dan Awrey. “They’re not getting their money back anytime soon,” Awrey says.

Part of the issue is that while Voyager has its own plan for how it thinks depositors should be treated in its reorganization, other creditors could choose to fight for a bigger piece of the pie. That would lead to lengthy court proceedings subject to a decision by the bankruptcy judge. What is more, the company’s contention that dollar deposits held on behalf of Voyager’s customers at a bank will quickly flow back to customers is also hard to fathom, Awrey says.

The Federal Deposit Insurance Corp. ensures that customers of a failing bank get access to their funds very quickly. But that protection is only triggered when a bank goes under. Since Voyager isn’t a bank, depositors of U.S. dollars could end up being treated like unsecured creditors in court, Awrey says.

Voyager spokesman Drew Pierson said in an email that the company’s plan “is subject to change given ongoing discussions with other parties, including potential financial and strategic investors, and requires court approval.” He didn’t respond to questions on how the company would treat U.S. dollar deposits.

In the meantime, barring a last-minute savior, Voyager’s customers could be stuck in purgatory. “From my perspective, the starting gun has barely gone off. This is going to take a while,” Awrey says.

Write to Joe Light at joe.light@barrons.com