Voyager Delivers Painful Lesson on Perils of Counterparty Risk in Bankruptcy Drama

Exposure to Three Arrows Sinks Crypto Exchange as Dominoes Fall

By: Aleksandar Gilbert Loading...

Voyager Delivers Painful Lesson on Perils of Counterparty Risk in Bankruptcy Drama

In late June, the top executives at Voyager Digital, a cryptocurrency exchange with 3.5M users, knew they were in deep trouble. Three Arrows Capital, the Singapore-based hedge fund, owed it hundreds of millions worth of crypto and showed no signs of servicing the debt.

Voyager CEO Stephen Ehrlich and his team embarked on a mad scramble to save their four-year-old company from the type of bank run that is wreaking havoc across the crypto sector. They hired lawyers. They hired a Wall Street Investment bank to rustle up a potential savior.

Enormous Stress

And they reached out to Alameda Research, the trading firm co-founded by Sam Bankman-Fried, the billionaire crypto impresario. It agreed to provide Voyager with $200M in cash and a revolving credit line financed by 15,000 Bitcoin even though Voyager was under enormous stress.

What happened next is a cautionary tale about the perils of counterparty risk, and how crypto, despite the promise of blockchain technology, is not immune to the same dangers and mistakes that have long plagued traditional finance.

In 2021, Voyager Digital raked in $415M in revenue, a 59-fold jump from the previous year. Just five months later the company, which is based in Jersey City, NJ, and has $1.3B of assets, filed for Chapter 11 bankruptcy.

It was the latest victim in the cryptocurrency crash of 2022. Yet the story of how it fell, and what comes next, may show how the industry can pick itself up and get back on its feet.

Three-Part Model

“The Debtors are facing a short-term ‘run on the bank’ due to the downturn in the cryptocurrency industry generally and the default of a significant loan made to a third party,” Ehrlich said in the dry language of a filing made in bankruptcy court in New York. “But the Debtors have a viable business and a plan for the future.”

Everything started to change in March. Co-founded in 2018 by Ehrlich and a trio of Wall Street and Silicon Valley entrepreneurs, Voyager was one of many platforms that married TradFi experience to the crypto game. The firm had a three-part business model: It provided brokerage services to crypto traders; custodial services that held onto crypto for customers and paid them with interest; and lending cryptocurrencies, with profits funding the interest payments.

That month, Voyager was sitting on about $6B worth of outstanding cryptocurrency loans to clients even though the firm, which is listed on the Toronto Stock Exchange, had a market capitalization of just $64M, according to court filings. Borrowers included Genesis Global Capital, Wintermute Trading, and Galaxy Digital. Alameda Research had borrowed $377M at rates ranging from 1 to 11.5%, the court papers show.

The imbalance was bad. Even worse, Voyager’s newest major counterparty was Three Arrows Capital, the hedge fund that had cut a swath through crypto to amass $10B in assets and investments in top tier projects such as Solana, Avalanche, and, most meaningfully, Terra.

Liquidity Issues

In March, Voyager had loaned Three Arrows 15,250 Bitcoin and $350M worth of USDC, a stablecoin, which, taken together, were worth about $1B. The timing couldn’t have been poorer as crypto, along with stocks, tumbled into a severe bear market.

When Terra’s stablecoin, UST, suddenly slipped its peg in early May, it triggered a chain reaction of failures across its ecosystem of interlocking tokens and wiped out the $60B project. In a declaration filed as part of Voyager’s bankruptcy, Ehrlich said he and his management team immediately grew concerned about Three Arrows’ exposure to Terra. On June 22, Voyager demanded that Three Arrows pay back $658M worth of debt in five days or face default.

It also tapped Alameda Research’s credit line for $75M, yet to no avail. “The Alameda loan facility was only a partial solution to the company’s liquidity issues,” Ehrlich said in his declaration.

In the meantime, Voyager had hired Kirkland & Ellis, a powerful corporate law firm, and Moelis & Co., a Wall Street investment bank, to find a white knight who could provide “potential sources of new liquidity.”

To that end, Jake Dermont, the head of the financial institutions group at Moelis, and his team solicited 60 potential partners in the investing industry with interests in cryptocurrency that might be receptive to a strategic deal with Voyager. Twenty of those firms signed confidentiality agreements and combed through thousands of pages of Voyager’s financial records to assess the company, the court record show. Moelis also shopped Voyager as an acquisition target.

‘The Alameda loan facility was only a partial solution to the company’s liquidity issues.’

Stephen Ehrlich

Yet only one potential suitor agreed to made a proposal for financing Voyager outside the scope of a bankruptcy proceeding. But it wasn’t accepted. “Potential counterparties expressed concerns regarding current uncertainty in the cryptocurrency market,” Dermont said in a declaration filed with the bankruptcy court.

Now Ehrlich, a capital markets veteran and the CEO of ETrade Professional Trading from 2002 to 2006, must shepherd the company through Chapter 11 bankruptcy, a court-supervised process that lets companies resolve outstanding debt and restructure its operations.

$110M in Cash

Ehrlich insists Voyager isn’t going anywhere and that it can continue operations. Voyager has already asked the court for permission to continue paying its 351 employees and to continue honoring some debit card transactions at its own discretion. It’s holding more than $110M in cash and crypto assets, $350M of customers’ money and $1.3B “of crypto assets on its platform.” It hopes to bolster those numbers by recovering some of what it is owed by Three Arrows.

Yet Three Arrows itself is also bankrupt, and it’s unclear how and if Voyager, which is just one of many creditors, will ever recover a significant portion of the $654M debt. As for Alameda Research, it’s now Voyager’s No. 1 creditor, with $75M on the line, according to the court papers.


Ehrlich notes that he and his team have considerable experience in handling market volatility. And Wall Street history is loaded with cases where one or two firms can crack and rock the entire market. That this has now happened in crypto is a poignant moment in the evolution of this young industry.

“The eventual implosion from Terra and Three Arrows Capital, and the resulting fallout, created the ‘cryptopaclypse,’” Ehrlich said in the declaration.

As Voyager Digital joins the list of fallen platforms, the focus will shift to which one is next.