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Retail investors face extra homework after Voyager’s demise: Lawyer

By Monte Stewart


Updated

Image of token
Retail investors face extra homework following crypto lender Voyager Digital demise, says a bankruptcy lawyer. - Photo: Shutterstock

Retail investors will need to do extra homework on companies holding their cryptocurrency in the wake of crypto lender Voyager Digital’s demise, says a leading US bankruptcy lawyer.

Daniel Besikof, a partner with Loeb and Loeb’s bankruptcy practice in New York, told Capital.com that Voyager’s customers could lose a substantial portion of their investments after the company filed for Chapter 11 bankruptcy in the US last week. To avoid similar troubles in the future, he said, retail investors will need to be more aware of who is holding their crypto assets and how they are being held.

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'Pennies on the dollar'

Besikof noted that Voyager customers are being treated, essentially, as unsecured creditors. In a recent Westlaw Today article that he co-authored with colleagues, he pointed out that, in bankruptcy cases, unsecured claims are often paid "just pennies on the dollar."

“Voyager is not planning to return everybody's crypto assets – at least in full,” said Besikof. “While there will be recoveries on account of those crypto assets that have been lost, it's not at all clear what the value of those recoveries will be."

Voyager is among companies experiencing financial distress after lending out their customers’ crypto on the promise of returning high yields. The bankruptcy filing came after crypto hedge fund Three Arrows Capital defaulted on a $650m (£547) loan from Voyager.

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Sell-off was ill-timed, says Nansen

According to blockchain analytics firm Nansen, Three Arrows exacerbated its woes with an ill-timed sell-off of its staked ether (stETH) holdings.

Besikof noted that Voyager filed a proposed restructuring plan in the US Bankruptcy Court’s Southern District of New York, which calls for account holders to be compensated with a pro-rated combination of coins that the company still has on deposit, stock in the reorganized company, Voyager digital coins (VGX), and a portion of funds recovered from Three Arrows. But the final outcome will likely vary from the proposed plan.

Accounts at greater risk

He said Voyager account holders’ digital coins were at greater risk than assets held in more traditional investment or bank accounts because the assets were not protected by the Federal Deposit Insurance Corporation, which secures bank accounts up to $250,000, or the Securities Investor Protection Act, which covers securities accounts held by a broker-dealer within the Securities Investor Protection Corporation.

“I don’t think [the safety of crypto assets] is a one-size-fits-all analysis,” said Besikof. “It really is a custodian-by-custodian analysis. And, you’ve got to look, I think, at both the documents that govern the account, or the custodian relationship, as well as how the company is actually functioning.

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“In other words, if the custodian is claiming that it is going to hold the crypto assets in trust, it's important to make sure the custodian is actually holding and segregating the customer’s crypto assets, not commingling them with the custodian’s own property.”

Photo of manDaniel Besikof, bankruptcy lawyer (Courtesy of Loeb and Loeb)

‘Very flawed’ business model

Every custodian has its own business model and customer agreement. And, the terms of each agreement, specifically as they apply to how the company transacts business and holds the crypto assets, could be “really important as well.”

More regulations expected

Besikof expects more regulations to result from the Voyager case. In retrospect, he said, Voyager’s business model – based on large loans to a few clients – was “very flawed” as one borrower’s financial troubles were enough to force the lender into bankruptcy.

“I'm not so sure that customers who invested in crypto assets, believed or understood that they were signing on for risk in excess of the inherent risk of a crypto investment,” he said. “That investment is risky enough without having to take on the kind of business risk of the of the exchange or custodian.”

 

Class-action lawsuit proposed

On Tuesday, Canadian law firm Siskinds LLP announced that it has commenced a proposed class-action lawsuit against Voyager, whose stock (VOYG) traded on the Toronto Stock Exchange before being suspended by a Canadian regulator last week.

Voyager has also applied for protection from creditors in accordance with Canadian bankruptcy law.

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