Voyager Digital Ltd. marketed its deposit accounts for cryptocurrency purchases as safe, protected by the nation’s banking insurance system in the event of a failure, the Wall Street Journal reported. This week, when the company tumbled into bankruptcy, customers learned they didn’t exactly have the protection they expected and a banking regulator began an inquiry. Voyager, a brokerage and lender, was caught in a spiral of plunging crypto prices that is collapsing hedge funds and companies and which blew a hole in its assets. Bitcoin, for example, has lost more than half of its value so far this year. Voyager froze all activity, including withdrawals on $350 million in customer deposits that are stored at Metropolitan Commercial Bank, a small New York bank. Voyager said customers would be able to access those dollars after “a reconciliation and fraud prevention process is completed.” It wasn’t clear how long that would take. The funds are expected to be paid in full to the customers. That may not be the case for crypto assets held at Voyager. Still, some customers online said they were only just learning their deposits weren’t insured by the Federal Deposit Insurance Corp. in the way they thought. Voyager had marketed the accounts as protected by that national safety net, an attractive pitch in the volatile world of cryptocurrency. Read more. (Subscription required.)
In related news, crypto trading firm Alameda Research provided emergency credit lines to the now-bankrupt crypto lender Voyager Digital Ltd., in which it owned a minority stake. Bankruptcy filings show Alameda was also a customer, the Wall Street Journal reported. Alameda, founded by the crypto billionaire Sam Bankman-Fried, borrowed $376.8 million worth of cryptocurrencies from Voyager, the filings in the New York bankruptcy court show, paying rates between 1% and 11.5%. Alameda “seems to be wearing every possible hat in Voyager’s bankruptcy,” as a creditor, shareholder and borrower, said Georgetown Law professor Adam Levitin. “There is a general phenomenon of a lot of recycled capital within crypto, and this is an example of that.” In an interview, Mr. Bankman-Fried said that Voyager had lent money to Alameda as part of its normal course of business, and that it was unrelated to the $75 million that Alameda recently lent to Voyager to ease the lender’s short-term liquidity crunch. “The money that was lent to Alameda is money that will ultimately be returned, and presumably used to pay back customers,” he said. The tight links between crypto firms are reverberating across the industry. Voyager’s bankruptcy was precipitated by the insolvency of the crypto hedge fund Three Arrows Capital — Voyager’s largest borrower, owing more than $650 million to the lender. Three Arrows defaulted on the uncollateralized loan on June 27. The Singapore-based hedge fund has been ordered to liquidate in the British Virgin Islands and sought protection from creditors in the U.S. on Friday. Read more. (Subscription required.)
