Robert was first introduced to Voyager Digital in March 2020.
Like countless others, he decided to give cryptocurrency brokers a try. The platform was easy to navigate. It offered him an annual percentage yield (APY) of up to 9% – much higher than a traditional savings account. It claims to be FDIC (Federal Deposit Insurance Corporation) insured. Being listed on the Toronto Stock Exchange, he thought, how bad could Voyager be?
Robert, who asked that only his name be revealed for privacy reasons, told Fortune magazine that he ended up investing six figures in Voyager, or 70 percent of his savings. Another user, who had invested on Voyager for about six years and asked to remain anonymous for security reasons, invested about $38,000 on the platform.
But now neither of them can withdraw any of their funds because the company suspended trading on July 1 and filed for Chapter 11 bankruptcy protection on Tuesday evening.
Voyager is also not FDIC-insured, although it advertises that “in the rare event that your dollar funds are compromised due to the failure of the company or our banking partners, you will be fully reimbursed (up to $250,000).” Its “banking partner,” Metropolitan Commercial Bank, is FDIC-insured, but Voyager is not.
Knowing that is “like a kick in the stomach,” says the six-year user.
“Honestly, I cry every day,” Robert says. “I didn’t know what to tell my wife. As partners, we decided to [invest in Voyager], but she trusted me more than anyone else to make the right decision.”
Now those investors are learning how Voyager was over-leveraged and how it invested their savings in a now-defunct hedge fund that engaged in extremely risky behavior.
‘It’s heartbreaking’
Voyager largely blamed the collapsed hedge fund Three Arrows Capital (3AC) for the problem, saying 3AC has yet to repay a $650 million loan.
Like other cryptocurrency markets, 3AC took a hit after the Terra ecosystem collapsed in May. By June, there were rumors that major cryptocurrency lender Celsius Network went bankrupt, and 3AC followed suit. Their failure triggered a domino effect across the industry as many of the major cryptocurrency lenders and funds appeared to be in contact with each other, and last week, 3AC creditors sought its liquidation in a court in the British Virgin Islands.
However, according to court documents, Voyager is trying to restructure rather than liquidate, meaning it wants to return at least some of its customers’ investments. voyager also said in court documents that it may offer its customers shares or tokens in the restructured company after it goes bankrupt. But in the meantime, its customers are struggling because they can’t withdraw their savings. As they await their next move, some have even shared thoughts of online suicide and depression.
“It’s heartbreaking,” Robert says. “I felt really bad because I wasn’t prepared for it.”
Voyager was like a bank, and that’s how most of its users treated it. Over time, brokers began offering high yields on their clients’ deposits. To cash in on their products, Voyager lent those funds to others, sometimes for even higher returns.
Before the company announced it was suspending withdrawals and filing for Chapter 11 bankruptcy, Voyager continued to tell customers it was doing well.
Just weeks before Voyager filed for Chapter 11 bankruptcy, CEO Stephen Ehrlich said customers’ assets were safe. In early June, Voyager tweeted that all “products and services are fully operational and unaffected by current market conditions, including transactions, rewards, deposits and withdrawals. We take risk management very seriously and protecting our clients’ assets is our number one priority.”
The company says it has “never been involved in DeFi [decentralized finance] lending activities.
Whether or not it engaged in DeFi lending, Voyager’s overexposure to 3ACs became apparent once the market turned around. The company hopes to shore up its finances after securing an estimated $500 million line of credit from quantitative trading firm Alameda Ventures in late June. But Voyager remained concerned about a “bank run” caused by users trying to withdraw funds, as its court filing states, and Voyager ultimately decided to go ahead with the Chapter 11 filing.
“I didn’t know Voyager was going to lend [customers’ USDC] to a hedge fund,” said the six-year subscriber. “If I had known it might be lent, I probably would have kept it in cash in my safe deposit box.”
“I did every single thing a reasonable person would do, and that was to take a look at the company,” Robert says. He noted that the company had not been targeted by regulators and took that as a good sign. “I should have known that. Obviously, in hindsight, everything is a different story.”
Scott Melker, a prominent crypto investor and podcaster with more than 851,000 Twitter followers, told Fortune that he has been using Voyager since 2019 and has “multiple seven figures” on the platform.
He said it was “painful” not to have access to the accounts he uses for savings, but noted that he has hedged his portfolio and understands that he is taking a lot of risk. For the most part, Melker feels badly about the people he tells Voyager, including friends, family and his audience.
“I know people will make their own decisions, but if I hadn’t had [Voyager] on their radar, they wouldn’t have even considered it. And, frankly, it’s worse than losing your own money,” he said.
What the future holds
A bankruptcy attorney and a cryptocurrency lawyer told Fortune that it is unclear how long the bankruptcy process will take. However, they stressed that Voyager wants to reorganize rather than liquidate, which is a promising sign for retail investors to recover any funds.
The company said it hopes to provide its users with at least partial funding after the restructuring. It is uncertain whether it will be able to make one complete for its users because of the wide variety of assets they buy on the platform.
Melker told Fortune magazine that he is one of the top 50 asset holders on the platform and that the top 10 or 20 asset holders may have a say in the progress of the bankruptcy proceedings, citing the hearings that just occurred.
Voyager recently said it has about $1.3 billion in crypto assets on its platform, adding that the company has more than $110 million in cash on hand and owns crypto assets that will “provide liquidity to support day-to-day operations in the Chapter 11 process,” it said. Voyager also mentioned that it held $350 million in customer cash in an account at Metropolitan Commercial Bank.
The experience has scarred some people to the point where they have vowed not to invest in cryptocurrencies. Others, by contrast, remain bullish.
Melker, for example, has nothing against the company or its creators. His history with Voyager runs deep – the company even briefly sponsored his podcast when he first started it, he says. He hopes he and others will see their assets again.
“Look, I lost millions of dollars,” he says. “You know, it’s embarrassing. I’m a guy who talks about risk management and protecting your assets, but in hindsight, I could say it was overexposure, but that’s what I feel comfortable with.”
Of course, Voyager users also hope they’ll have access to their savings soon.
“Unfortunately, hopefully it wasn’t a plan, but I had no control over anything,” Robert says. “All I needed was to get my original assets back. I didn’t need the rewards or the interest earned. I just need to get the assets back.”
Voyager Digital did not immediately respond to Fortune’s request for comment.
This story originally appeared on Fortune.com
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