July 6, 2022: Voyage to bankruptcy

Foreword

This is a quick note, which tends to be just off the cuff thoughts/ideas that look at current market situations, and to try to encourage some discussions.

Voyager Digital just filed for bankruptcy. What happens next is going to be interesting.

As usual, a reminder that I am not a financial professional by training — I am a software engineer by training, and by trade. The following is based on my personal understanding, which is gained through self-study and working in finance for a few years.

If you find anything that you feel is incorrect, please feel free to leave a comment, and discuss your thoughts.

Sailing to bankruptcy

According to Bloomberg, Voyager Digital, the crypto broker, just filed for chapter 11 bankruptcy.

In the regular world …

Now, if this was a regular broker, the process is fairly well established and straightforward. Generally speaking:

1. The regulators and SIPC will try and find a buyer for the assets of the broker.
2. If a buyer is found, that buyer will provide customers with new login details (or in some cases, use the bankrupt broker’s existing website/apps).
   1. Most customers will basically see no real down time, except for maybe creating a new account on the new broker’s website.
   2. SIPC will work in the background with the new broker to recover assets.
3. If a buyer is not found, then a trustee of some form is created to find assets and distribute them.
   1. Customers with accounts below the SIPC insurance limits (currently $500k, at most $250k of which can be cash) will get instructions on how to move their assets to a broker of their choice. This probably takes a few days to a few weeks.
   2. Customers with accounts above SIPC insurance limits will get assets up to the insurance limit, and anything else will be considered unsecured debt against the trust.

For the majority of customers, it should mostly just be an inconvenience.

… and then there’s crypto

Since there are no regulators in crypto, and no insurance scheme, points 1, 2.2 and 3.1 don’t apply. Basically, if a buyer is found, the buyer assumes all liabilities (i.e. customer assets), and if a buyer is not found, then all customers become unsecured creditors to the trust.

But how would it actually work?

In regular finance, the assets are typically kept at third party custodians, so the process is relatively easy — the custodian freezes the account until SIPC/regulator/trustee signs off on release of assets. But in crypto, there are rarely third party custodians — Voyager itself likely holds the keys to its crypto assets, and in many cases, the assets are backed by the broker itself, such as Voyager Tokens.

If the accounts are at a third party, a court order will force the custodian to freeze the accounts, and any missing assets from that point on must be repaid by the custodian. But if Voyager (and presumably its executives) holds the keys to the assets, how do you freeze the assets?

What’s preventing some Voyager executive from mysteriously dying after all the assets disappear?

What would Voyager Tokens be worth after chapter 11?

Are the courts able to even wrap their heads around all of these to make a reasonable ruling?

Will the entire process take so long that the price of the assets shift dramatically? And if so, are customers owed the assets, or the value at time of bankruptcy, or the value at time of distribution? This is particularly interesting because Voyager loaned out much of the assets, and with the broker now defunct, how is it going to continue servicing the loans (issuing margin calls, collecting collaterals, etc.)?

So many questions! This event has the possibility of bringing a lot of clarity to the murky world of crypto. Stay tuned!