Thinking about Voyager Digital (1/2)
Maybe one party representing 50%+ of your loans is a bad idea...
Hi All,
A super interesting topic today! Voyager Digital is a crypto exchange that filed for chapter 11 bankruptcy. To begin with the obvious, “bankruptcy” and “my crypto exchange” are not two phrases that you want to collide! Therefore, in this two-part blog (!!!), I’m thinking about what % recovery will users get on their deposits.
Before we start, crucially, this is not advice and does not represent the thoughts of my employer :). It’s just for *fun*. Let’s dive in
In this post, I will set the scene and speak on the main ideas behind corporate restructuring. In the next post, I’ll dive into the restructuring plan, financials of Voyager and finally guesstimate the % recovery that users will get back.
What is Voyager Digital?
Voyager Digital (Voyager) is a publically listed (Toronto Stock Exchange) crypto exchange based in NYC. They enable people to buy and sell 100+ cryptocurrencies. They also enable users to deposit their crypto and earn up to 12% APY (read as interest) - compared to banks that offer 1.5% maximum (at least in the UK). They keep custody of user’s crypto while it is on their platform.
The above stats look impressive... With a team that seems technically strong:
At its peak, Voyager was valued at $5bn!
We will discuss financials in more detail in the next post, but Voyager has c.$100m in cash and $2.3bn in assets (as of Jun-22).
To keep score: Voyager is a one-time unicorn that offers crypto trading/APY gain to 3.5m users, who have deposited $2.3bn in digital assets onto its platform.
NB: Only 1.19m were “funded accounts,” accounts where users actually deposited money onto the platform vs. simply opening an account
Flashback to mid-2021 and that sentence would send venture capitalists' hearts racing!
So What happened to Voyager - Setting The Scene
Three Arrows Capital (3AC) are a crypto hedge fund that was rumoured to have $10bn+ in assets under management. I *speculate* that they wanted to bet *BIG* on crypto assets appreciating and the way they did this was as follows:
Take out a collateralized loan on their crypto assets at lender A
Go to lender B and show them your initial deposits of crypto + the amount you’ve taken out in loans (but don’t tell them it is a loan). Lender B would then give you even more loans
Critically, this second loan would be under-collateralised (i.e. Josephine takes out a loan without giving the lender an asset to sell should she not be good to repay/pay interest)
They are able to get away with this as the people that run 3AC had a great reputation across the industry and were looked upon as Greek gods on Mount Olympus! They could easily repeat the above
By doing this, they can have a massive amount of capital to bet big on crypto price appreciation
They also had Three Arrows Capital ventures. An investment arm that invested in the leading companies in the space. No conflict of interest with those loans I am sure!
From a lender’s perspective, giving money to these guys may seem like a no-brainer. (Again, the above is speculation)
Critically, the under/no collateralised backing of their loans may prove fatal.
Lethal (?) Mistake
Enter Voyager.
Voyager loaned 15,250 Bitcoins ($300m) and $350m of $USDC to 3AC. Imagine the scenes at Voyager. As a public company, they probably thought "Wow we’re going to massively increase our loan book and the market is going to be so impressed at our rate of growth!” Ouch.
You can actually see Voyager sending the transactions to 3AC on chain!
#1: Voyager → 3AC. Test transaction of $20 worth of $USDC
#2: Voyager → 3AC. Sent c.$100m worth of $USDC
#3: Voyager → 3AC. Sent $100m worth of $USDC
#4: Voyager → 3AC. Sent $150m worth of $USDC
Date & time (9th March - 1st April) + Nansen Wallet Pair Profiler agrees with this.
I speculate that this loan was not collateralised…
Default:
In Jun-22, Voyager issued a market update that announced (forewarned) that 3AC would default on their loan. Later in the week, 3AC was ordered to liquidate its assets via a court order. Below is from Voyager’s CEO.
At the same time, Voyager announced that Alameda Ventures - run by billionaire Sam from FTX - would provide them with two RCFs (read as a credit card for companies), $220m in cash and 15,000 $BTC (combined c.$520m). Alameda also owns c.11% in Voyager.
However, as with real credit cards, this was not free money. Alameda restricted the use of the RCF (documents here):
Only $75m can be withdrawn in a 30-day period
Voyager cannot use the RCF should customer assets fall below $600m on the platform
Voyager’s corporate debt is limited to approx 25% of its customer assets on the platform
Funny/nice fact - the RCF docs cover what happens in BTC airdrop/hard fork scenario (page 2) lol!
Halts Trading
On 01-Jul, Voyager suspends trading, deposits, withdrawals and loyalty rewards + hires Moelis & Co., The Consello Group, and Kirkland & Ellis LLP as corporate advisors. Yes, this means if someone had $$$/crypto on the platform, these have been frozen or seized (the technical definition of this is yet to be determined)!
97% of customers on Voyager’s platform have less than $10,000 in their account. The top 50 users have a combined c.$100m on the platform with the top user having c.$8m!
On June 23, 2022, Voyager reduced its daily withdrawal maximum from $25,000 to $10,000 per user per day. So imagine how this ticking time bomb must have felt….
Bankruptcy Proceedings
On 04-Jul, Voyager files of Chapter 11.
*** Break ***
Oof, what a blog post it’s been so far. Voyager has gone from a unicorn crypto exchange darling to a lender that potentially has $650m in bad debt + a business with no operations!
In the next section, I’ll explain the basics of restructuring. I promise that I’ve tried to make the following as interesting/clear as possible! Besides, it will help with understanding part 2!
Basics of restructurings
At some stage in a company’s life, it takes up debt. This can be to increase its offering/expand its geological footprint or to buy another company.
The debt has two legs; the first one is a promise to pay back the loan on a day in the future and the second one is to pay interest on the loan.
A company undergoes restructuring when they cannot afford to pay the interest on the schedule agreed upon or predict that they cannot afford to pay off the loan / arrange a new loan. A restructuring process can also start if the company breaks restrictive terms laid out in the loans - such as having a minimum cash balance.
Typically, a company’s balance sheet may look like the below. It’s assets = its debts + equity. Note, here assets are consists of crypto users’ deposits, cash held by Voyager and the loans that Voyager makes. Debt is made of typical debt but also as “IOUs” on the users’ deposits as they need to be paid back (i.e. they need to pay Josephine back the assets that she deposited with them).
Let’s say image A shows Voyager’s balance sheet before providing the loan to 3AC. The debt side is basically the total of users’ deposits. The assets side is cash/crypto held by the company + the digital assets “owned” by the depositors (total of users’ deposits).
It’s easy to get tripped up here. When a user gives $100 to Voyager. It is added to the balance sheet as a liability (debt) as Voyager must pay them back. The $100 is also added as an asset as Voyager can now use that $100 to give people loans. This means the balance sheet would balance.
Image B shows that Voyager converted some of the users’ digital assets into a loan and gave it to 3AC. We can see that this creates a “from users deposits” section. This is simply the $$$ that Voyager borrows from users in order to make the loan!
Image Ca shows 3AC no longer being able to pay off this loan and hence Image Cb leaves an “asset hole” on the balance sheet. The balance sheet thus does not balance anymore!
Therefore to save the company, emergency capital is required - this was the Alameda RCF (credit card) as shown below in image D.
NB: In reality, the RCF does not cover the hole on the balance sheet but it allows Voyager to at least pay back depositors trying to exit / with other solvency issues.
Bank run
What likely then happened is depositors ran for the hills following the announcement of the RCF and 3AC issues + took their deposits (assets) with them. This made the issue worse (image E) hence trading had to be halted.
So today we are at image E. Voyager’s balance sheet does not balance. It has broken the restrictions (explained above) and cannot pay back all depositors. Hence it must restructure….
That’s all for this post folks!
At best, you enjoyed reading this as much as I enjoyed writing it. At worst… you learnt something new!
In the next post, I’ll go through Voyager’s restructuring plan, its financials and finally, consider how much recovery each user will receive.
Thanks for reading + God bless.
Joseph
17th July 2022