Cryptocurrency broker and lender Voyager Digital Ltd. filed for Chapter 11 bankruptcy protection late Tuesday, becoming the latest victim of a contagion rippling through the crypto world.
Voyager, which is listed in Toronto and operates a U.S. cryptocurrency platform, said in a court filing that it faced a "run on the bank," as it was flooded with withdrawal requests by customers while some of its own investments soured or froze.
The firm's downfall illustrates the chain reaction across the sector following large declines in many digital currencies. Voyager said its problems stem above all from the more than $650 million it lent hedge fund Three Arrows Capital Ltd. -- a debt Voyager recently said Three Arrows was unable to repay. Last week, a court in the British Virgin Islands ordered the hedge fund to liquidate after it suffered heavy losses from the collapse of Luna and other cryptocurrencies since May.
Voyager's chief executive officer, Stephen Ehrlich, said in the filing that the firm has "a viable business and a plan for the future." It hopes to restructure, returning customers some of their investments while also giving them ownership in the reorganized company, Voyager said in court filings.
The company said in a statement that it had around $1.3 billion of crypto assets on its platform, plus $110 million of cash and owned crypto assets that would help support its operations during the Chapter 11 process. It also said it has more than $350 million cash in an account at a New York bank that holds funds for Voyager's customers.
The Chapter 11 filing comes just weeks after Voyager assured customers of its own stability -- a trait that has been a common feature of wobbly crypto firms that went on to suspend withdrawals.
On June 14, Voyager said in a tweet: "We have the experience to back our decisions and weather any bear market." It added it had a "low-risk approach to asset management."
A month earlier, days after Luna and its sister cryptocurrency TerraUSD collapsed in value, Mr. Erlich said on an investor call that Voyager has "zero issues with any of our borrowers," and the company had recently "verified there was no contagion" with the companies it lent to.
Voyager, which was started in 2018, ran a business similar to a bank mixed with a brokerage, in which customers deposited crypto assets to earn high interest rates. Voyager in turn sought to profit by lending to others in the crypto sector at even higher rates.
To customers, Voyager marketed its offerings as safe, particularly for U.S. dollar deposits. "In the rare event your USD funds are compromised due to the company or our banking partner's failure, you are guaranteed a full reimbursement (up to $250,000)," Voyager wrote in a 2019 post.
Voyager's main banking partner, New York-based Metropolitan Commercial Bank, also sought to reassure customers of the crypto broker that they would be protected.
The bank said on its website that an omnibus account containing funds of Voyager customers was insured by the Federal Deposit Insurance Corp., and that standard deposit insurance covers up to $250,000 per depositor. It noted, however, that FDIC insurance "is available only to protect against the failure of Metropolitan Commercial Bank" and that it "does not protect against the failure of Voyager."
Voyager's latest statement said customers would receive access to their cash "after a reconciliation and fraud prevention process" with the bank.
Until recently, Voyager benefited from a model that mushroomed in the crypto sector in the past two years. The company was flooded with deposits after offering customers interest rates as high as 9% on stablecoins tied to the dollar -- an offering mirrored by many competitors.
Underpinning the borrowing-and-lending business, though, was a slim cushion in the event of a downturn.
Voyager reported having $6 billion in assets and $258 million in shareholder equity, a ratio of about 23:1 as of March 31. That compares with a median assets-to-equity ratio of 9:1 for all North American banks in the S&P 1500 Composite index, according to data from FactSet.
Many of Voyager's investments were in the form of loans to other crypto companies, adding significant risk compared with loans by a standard bank.
Similarly, the giant crypto lender Celsius Network LLC had an assets-to-equity ratio of 19:1 as of spring 2021, according to documents viewed by The Wall Street Journal. The lender, which had more than $12 billion in deposits as of summer 2021, has hired lawyers to advise on a potential bankruptcy filing.
Voyager said in its filing that Celsius's actions added to its own problems. After Celsius froze withdrawals June 12, citing "extreme market conditions," Voyager said it saw increased withdrawals from its own customers, "putting additional strain on the Company's business."
The company won a short-lived reprieve on June 22 by getting a credit facility worth about $500 million from Alameda Ventures. The company is controlled by crypto billionaire Sam Bankman-Fried, who also runs trading platform FTX.
But withdrawals continued, Voyager said, and it sought further rescue financing. After advisers reached out to 60 potential buyers and investors, it only received one proposal for a financing outside of bankruptcy court -- a proposal Voyager rejected.
The company suspended trading and withdrawals July 1 and prepared its Chapter 11 filing.
The company said it would continue to talk with outside investors and seek someone that could buy the company in full or take a large stake.
The crypto broker's restructuring plan also proposes to give customers a combination of cryptocurrencies, shares in a reorganized Voyager and anything the firm can recover from its loan to Three Arrows Capital, its court filing said.
If it is completed as Voyager hopes, the restructuring will give its account holders a "meaningful recovery" on their holdings, the company said.
Other creditors are poised to do worse. By the time of the filing, Alameda had lent Voyager $75 million from the credit facility set up last month. Under Voyager's proposed restructuring plan, that debt would be wiped out. Alameda declined to comment.
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