The Implosion of Voyager Digital

Welcome to the 70th Pari Passu newsletter.

A few weeks ago, we covered the fascinating restructuring of Celsa and its implications on the European Restructuring landscape. Today, we are back with another restructuring story: the implosion of Voyager Digital.

Voyager Digital was always supposed to be different. Following its inception in 2018, Voyager rapidly rose to become a heavyweight in the crypto community. Intending to develop the “next generation brokerage,” Voyager’s all-star founding team sought to “bring choice, transparency, and cost efficiency to the marketplace.” Unfortunately, the story of Voyager ends in a completely different manner: something akin to a bank collapse. This article explores how this seemingly unlikely process happened, as well as the “one-of-a-kind” in-court restructuring process that Voyager went through. This process included multiple failed rescue buyouts, precedent-setting legal debates, criminal cases, and ultimately liquidation. Let’s dive in.

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Overview - The Next Generation Brokerage

In the beginning, it appeared that Voyager’s team was poised to succeed in their lofty goals. The talented and experienced founding team included CEO Stephen Ehrlich, former CEO of E*TRADE’s professional trading business, and Oscar Salazar, the founding architect and CTO of Uber. Voyager Chairman, Philip Eytan, was an early investor in Uber, and CTO Serge Kreiker was a former lead in Bloomberg’s trading systems group. The team wasted little time ramping up operations and scaling Voyager following its founding in 2018. In February 2019, the company went public on Canada’s TSX Venture Exchange through a reverse merger valued at $60mm, utilizing the shell of a mineral exploration company that ceased operations in 2015. A few months later, experienced Canadian crypto investor Enzo Villani’s Thrust Capital invested in Voyager through a $1.8mm Private Placement, or PIPE investment. By the end of 2019, Voyager’s large aspirations were clear, evidenced by beta testing for an expansive range of offerings that included investment and savings accounts, loan products, and margin trading [1, 2, 3].

At a glance, Voyager’s business can be thought of similarly to many traditional financial services firms. There were three core offerings that grew to comprise the core of Voyager’s business:

1. Brokerage Services: Provided customers a platform to trade cryptocurrency across a variety of exchanges (much like a traditional trading desk/brokerage).

1. Custodial Services: Permitted customers to “deposit” cryptocurrency onto the platform, and earn interest in return (like a bank). This interest could be paid in one of three forms: (i) Payable-in-kind (PIK) interest, i.e. interest paid in the form of the cryptocurrency deposited, (ii) Voyager’s own cryptocurrency which offered additional account enhancements, or (iii) As a “staked” value at the time of deposit which would be available after a fixed amount of time.

1. Lending Services: Enabled customers to “borrow” cryptocurrency against their deposits at pre-negotiated interest rates. This repaid interest was then used to pay, among multiple items, the interest to customers that deposited cryptocurrency onto Voyager’s platform.

Source: Voyager Digital

Despite intense competition from other exchanges, Voyager’s offerings appealed to a broad, growing retail base, with 97% of clients storing less than $10,000 on the platform. In particular, security and compliance were prominent selling points for the exchange, which boasted proprietary checks using automated APIs and voluntary registration with various government and enforcement agencies. Furthermore, the exchange, unlike competitors like Coinbase, Paxos, and Gemini, permitted customers to opt for self-custody, meaning that they had the (often unused) option to retain legal control over their crypto assets instead of turning them over to the institution [1, 13].

2021 was a banner year for the company. Given massive fiscal stimulus following the early stages of the COVID-19 pandemic, including low interest rates, asset values skyrocketed, a phenomenon magnified in cryptocurrencies. New customers increased, and revenues exploded from $1.2mm in 2020 to $175.1mm as the company matured and improved monetization. The company also completed a $85mm acquisition of  Denmark-based Coinify, a crypto payment platform, enabling Voyager customers to make and receive payments from others in crypto. Given his experience completing eight mergers and acquisitions at E*TRADE and now supported by public equity and $200mm in cash on the balance sheet, Ehrlich confidently stated his intent to utilize M&A to rapidly grow Voyager within the fragmented crypto space. He noted that besides Coinbase, Voyager was the only other publicly listed crypto platform. Crypto-crazed investors also noticed, propelling Voyager’s market capitalization to a peak of over $3.7bn in March 2021 [4, 5, 6].

Asked about the rapid increase in values in the crypto market and the potential for a bubble, Ehrlich remained nonchalant: “I think the market looks completely different today from what it looked like in 2017. We all remember 2017.” For context, 2017 was a bubble in the crypto world that was followed by a broad selloff in January 2018 without any structural reason. The whole crypto market tanked, including bitcoin, which fell by 65% in a single month. Ehlrich had some good reasons to be confident. At its height in early 2022, after only four years into its existence, Voyager boasted 3.5mm users and $5.9bn in assets, comparable to a small regional bank or a respectable wealth management firm. The company boasted top-tier partnerships across the crypto industry and beyond, including with the NBA’s Dallas Mavericks, and appeared to be at the forefront of new offerings [4, 15].

The Cryptopocalypse: “It’s Different This Time”

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