Voyager: The Convergence of Chapter 11 and the Crypto Winter | Bracewell LLP

Voyager Digital Assets, Inc., a leading cryptocurrency brokerage and lending platform, filed for Chapter 11 bankruptcy protection in the Southern District of New York on July 5, 2022 after the recent financial crisis impacted the crypto industry, which investors dubbed “cryptocurrency.” denote Winter.” The filing was followed by Celsius Networks Chapter 11 bankruptcy. While the situation is fluid, these two filings could mark the start of a series of bankruptcies by major cryptocurrency companies. As global financial markets deteriorate and investors divest their assets — particularly in the riskier cryptocurrency realm – more companies could be forced to seek refuge in bankruptcy, posing new problems for courts tasked with distributing digital assets to creditors.

With Voyager being 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 winners and losers will emerge based on the actions the parties are now taking in these uncertain ones seize times . Here at Bracewell we have extensive experience in restructuring debtors, shareholders, creditors, ad hoc groups, creditors’ committees, asset buyers and other distressed investors. We have combined our restructuring and crypto expertise to form a team of lawyers focused on the issues that interested parties should know about to protect their interests and the current market both inside and outside the use bankruptcy.

According to historical accounting data, Voyager’s financial struggles were somewhat abrupt and in stark contrast to last year’s results. Voyager had a strong fiscal year in 2021, thanks in large part to an increase in customer deposits, which the company used to provide credit to counterparties in the crypto space. These inter-industry loans are common in the crypto world and have been used in good times to pass the interest earned on the loans directly to customers. However, as the underlying value of digital assets fell in recent months and customers withdrew their assets, counterparties defaulted on loans, leading to a 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 has recently struggled and subjected itself to bankruptcy proceedings in the British Virgin Islands and a concomitant Chapter 15 bankruptcy in the southern District of New York undergoes . Stephen Ehrlich, Voyager’s Chief Executive Officer expressed high hopes for the company’s future, but noted that Voyager’s goal of a “major 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, along with a possible sale process. Through the proposed to plan, Voyager seeks to distribute a combination of crypto held on the Voyager platform, shares in the reorganized company, Voyager tokens, and proceeds from Three Arrows’ recovery to customers. The enterprise disclosed that has $110 million in cash and crypto assets and $1.3 billion in crypto assets on its platform. It also has more than $350 million in cash in a For Benefit of Customers account with the Metropolitan Commercial Bank. Unlike customers’ digital assets on the Voyager platform, which the company considers property of the bankruptcy estate — a position likely to be hotly contested in the proceedings — Voyager has given customers the immediate return of the $350 million upon the completion of a reconciliation US dollars promised and fraud prevention process through the bank. Despite these assets, Voyager, as an unsecured creditor in Three Arrows’ bankruptcy, the successful reorganization and confirmation of the plan will ultimately depend on the amount it recovers from Three Arrows’ ongoing liquidation.

Voyager has said it is reviewing all options to maximize customer winback, including a two-pronged restructuring process that could result in the sale of the company rather than distribution under the proposed plan. July 21st, Voyager filed a bidding process request that calls for a confidential bidding process to be launched before the plan is confirmed, and has worked with more than 80 interested parties. While it’s possible that a successful offer would supersede the proposed distribution of assets to customers, Voyager makes it clear that it prefers a sale that can be accomplished through the proposed plan.

The Voyager bankruptcy raises new questions regarding the distribution of digital assets under the bankruptcy law. At Voyager’s first day hearing, the court questioned whether digital assets on the Voyager platform should be considered estate property and thus subject to distribution to unsecured creditors or property of Voyager customers themselves. The answers to these novel questions are likely to come soon as the Southern District of New York dives into the substance of the Voyager and Celsius Network bankruptcies. The answers will ultimately determine the recovery success of these and other companies pushed into bankruptcy by the crypto winter.

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