Digital Asset Leader Ranks Chapter 11 Due To Crypto Winter Crisis
Voyager Digital Assets, Inc., a leading cryptocurrency brokerage and lending platform, filed for Chapter 11 bankruptcy protection on July 5, 2022 in the Southern District of New York in following a recent financial crisis affecting the crypto industry, which investors are calling “crypto winter.” The filing was followed by the Chapter 11 bankruptcy of Celsius Networks. these two filings could be the start of a series of major cryptocurrency company bankruptcies. more companies could be forced into bankruptcy, raising new issues for courts tasked with distributing digital assets to creditors.
Because Voyager is the first cryptocurrency company to file for Chapter 11, a new law will quickly develop in the bankruptcy proceedings that will have a lasting impact on the cryptocurrency industry, and the winners and losers. will emerge based on the actions the parties take now during these uncertain times. . At Bracewell, we have extensive restructuring experience representing debtors, shareholders, creditors, ad hoc groups, creditors’ committees, asset buyers and other distressed investors. We’ve combined our restructuring and crypto expertise to form a team of lawyers who focus on the issues interested parties need to know about to protect their interests and take advantage of today’s market, both inside and outside of bankruptcy.
According to historical balance sheet data, Voyager’s financial difficulties were somewhat abrupt and contrast sharply with the prior year’s results. Voyager had a strong financial year in 2021, thanks in large part to an increase in customer deposits that the company used to make loans to counterparties in the crypto sector. These intra-industry loans are common in the crypto world and, in good times, have been used to transfer interest earned on loans directly to customers. However, as the underlying value of digital assets has fallen in recent months and customers have withdrawn their assets, counterparties have defaulted on loans, leading to a cascading financial crisis.
In a recent Press release, Voyager cited general market conditions as well as a defaulted $650 million loan to Three Arrows Capital – a crypto hedge fund that recently struggled and was itself the subject of an indictment. insolvency in the British Virgin Islands and a consequential Chapter 15 bankruptcy in the Southern District of New York. Stephen Ehrlich, CEO of Voyager Express high hopes for the future of the company, but noted that Voyager’s goal for a “complete reorganization is the best way to protect assets on the platform and maximize value for all stakeholders, including customers”.
Voyager recently proposed a Chapter 11 reorganization plan to emerge from bankruptcy, as well as a potential sale process. Through the proposal to plan, Voyager seeks to distribute a combination of crypto held on the Voyager platform, shares of the newly reorganized company, Voyager tokens, and proceeds from the recovery of the Three Arrows to customers. The company disclosed which has $110 million in cash and crypto assets as well as $1.3 billion in crypto assets on its platform. He also has more than $350 million in cash held in an account for the benefit of Metropolitan Commercial Bank customers. Unlike customers’ digital assets on the Voyager platform which the company considers to be the property of the bankruptcy estate – a position that will likely be hotly contested in the proceedings – Voyager promised the immediate return of the $350 million to customers. after completion of a reconciliation and the bank’s fraud prevention process. Despite these assets, as an unsecured creditor in the bankruptcy of Three Arrows, Voyager’s successful reorganization and confirmation of the plan will ultimately depend on how much it recovers from the ongoing liquidation of Three Arrows.
Voyager said it was exploring all options to maximize customer recovery, including a two-track restructuring process that could lead to the sale of the company instead of distribution under the proposed plan. July 21, Voyager deposit a Tendering Procedures Query requesting the initiation of a confidential tendering process prior to plan confirmation and engaged with over 80 interested parties. While it is possible for a winning bid to override the proposed distribution of assets to customers, Voyager is making it clear that its preference is for a sale that can be made through the proposed plan.
Voyager’s bankruptcy raises new questions regarding the distribution of digital assets under the Bankruptcy Code. During Voyager’s day one hearing, the court debated whether the digital assets on the Voyager platform should be considered the property of the estate, and therefore subject to distribution to unsecured creditors, or the owned by Voyager customers themselves. The answers to these new questions are likely to come soon, as the Southern District of New York wades through the substance of the Voyager and Celsius Network bankruptcies. The answers will ultimately determine the success of the reorganization of these companies and others forced into bankruptcy by the crypto winter.