The unique bankruptcy of Voyager Digital

Voyager Digital has applied for Chapter 11 bankruptcy protection on Tuesday, enclosing documents containing numerous revelations, not the least of which is how the Toronto-based crypto lender describes its own business.

Why is this important: This detail highlights the uniqueness of the ongoing proceedings, which will be closely watched by regulators and investors as the company embarks on a journey to unravel its books in the public eye, as crypto store.

  • Call it a “Frankenstein bankruptcy,” Robert Honeywell, restructuring partner at K&L Gates, told Axios.

Quick take: Bankruptcy filing forms are not suitable for a crypto lender.

  • Traveling, unable to check off a description of his business from the choices listed – healthcare business, single asset real estate, railroad operator, stockbroker, commodity broker, clearing bank – no, checked “none of the answers above”.
  • She describes her activity as a brokerage.
  • Bizarre, because the type of bankruptcy proceedings he filed for does not correspond to the company described.

Between the lines“If you look at the plan they filed, they’re still trying to treat this as a broker/dealer bankruptcy because they put customers in a different class of unsecured creditors,” K&L Gates’ Honeywell said.

  • “And everyone else is in other classes. If a broker/dealer goes bankrupt, customers get priority for their ‘securities accounts’ and everyone else gets what’s left.”
  • Honeywell refers to what is called a SIPA liquidation.

The context: Voyager seems to be trying to stay in line with regulators’ expectations.

  • Coinbase recall in May had to appease customers worried about possible bankruptcy after SEC asks company to update risk disclosures in filings to treat customers as “unsecured creditors”.
  • This is how Voyager also handles customer accounts.

The big picture: This will impact who – customers and other creditors – will be paid on their claims and in what order, both in this process and potentially in others that will follow in the crypto world.

What they say: CEO Stephen Ehrlich tweeted following the bankruptcy filing and a statement on Voyager’s website that customers with crypto in their accounts will somehow be recovered through the reorganization .

Yes, but: The current restructuring plan is subject to change. Voyager’s record reads as follows:

  • In June, Voyager brought in Moelis to gauge buyers’ appetite for their business or a cash injection and “several parties have expressed interest in participating in a possible legal transaction.”
  • Voyager calls its interim plan a “hunting horse” proposal, in which Voyager will engage with third-party investors to sponsor the plan or provide alternative financing for full or partial ownership of the reorganized company, according to filings.
  • This song is also remarkable.

The plot“They may want to stimulate other offers,” Honeywell said. “They decided to file right away, apparently without an agreement with their major creditors, actually quite unusual.”

  • Indeed, bankruptcy filings indicate that Voyager is still trading.
  • “The real question is that even if they file as Chapter 11, will clients who have performance accounts with Voyager say, ‘I’m not just a normal unsecured creditor, I’m a security holder,’ even though no regulator has said they are that,” Honeywell said.
  • A customer claiming to be a securities account holder, Honeywell speculates, would be moved to the top tier of unsecured creditors.

Here is the untested proposition: Regulators have suggested that [digital assets] are securities, but that won’t be tested until someone claims to be a securities client,” he said.

digital travel declined to comment.

And after: Assuming the proposed restructuring plan remains intact, Voyager should provide a new estimate of what its creditors owe and put it to a vote.

  • “If no one objects and everyone votes in favour, it might just pass,” Honeywell said.

Our thought bubble: This crypto bankruptcy will also test the so-called “Community”. If they can all agree, the proposed plan could follow the process. Infighting, however, will drag him out.

what we watch“Bankruptcies are hotly contested battles and there is an entire industry of people who buy debt in order to fight in bankruptcy court,” Honeywell said.

Janet E. Fishburn