July 16, 2022

‘I just wake up and cry’: Voyager and Celsius bankruptcies have destroyed some crypto investors’ confidence in centralized platforms

[MarketWatch, Yotsy Ruiz]

The failures of the two digital currency financial platforms have shaken investor faith in firms that underpin the nascent crypto industry.

Yotsy Ruiz has more than 11,110 Cardano and 360,000 Terra Luna Classic deposited with Voyager.

Yotsy Ruiz recently bought his first ever crypto hardware wallet — a Nano X from Ledger. He is transferring all his crypto holdings that he can still move to the small physical device which looks like a USB flash drive, and away from large centralized exchanges such as Binance and Coinbase. 

The 40-year old resident of Frederick, Md., who owns a home remodeling business, hastily made the move after crypto broker Voyager Digital, which he trusted with some of his savings, froze all user withdrawals at the start of July and filed for bankruptcy protection.

In November, Ruiz invested about $33,000 of crypto on the Voyager platform. His holdings, including more than 11,110 Cardano ADAUSD, 0.67% and 360,000 Terra Luna Classic LUNAUSD, 0.52% among others, are today worth about $5,000 as crypto prices have plunged. Now, it’s unclear if Ruiz will ever even get his coins back.  

“Sometimes you want to buy coins like Shiba Inu SHIBUSD, 0.19%, you want to buy Dogecoin DOGEUSD, 0.25%, people tell you, ‘no, no, don’t buy that, those are bad products and you can lose the money.’ But then you trusted these exchanges. You lost not only one coin, but all the money there,” Ruiz said in an interview with MarketWatch.

Voyager said it had signed up more than 3.5 million users as of March 31, by offering high interest rates that reached up to 12% on their crypto deposits and connecting customers to crypto exchanges and market makers for trading. It also partnered with Mastercard on a debit card backed by stablecoin USDC that granted rewards of up to 9% annually. But the crypto broker sank into the swamp after it said Three Arrows Capital, a Singapore-based digital asset hedge fund that was recently ordered to liquidate by a court in the British Virgin Islands, defaulted on over $650 million of loans to the company. 

With the crash of cryptocurrencies, several companies, like Voyager and Celsius Network, that emerged during the go-go years to offer digital currency investors lightly regulated financial and banking services have collapsed. As bitcoin has traded 70% lower from its all-time high, and smaller coins have tumbled even more, crypto lender Celsius, which said it had more than 1.7 million customers, stopped all customer withdrawals in June and filed for bankruptcy protection on Wednesday. Now, Celsius customers are faced with being unsecured creditors in federal bankruptcy court in New York. Digital asset exchange CoinFlex has also paused customer withdrawals. These failures have shaken investor confidence in many firms that underpin a nascent industry that has attracted huge capital inflows. 

Ruiz, who also invested in Terra’s Luna Classic, previously known as Luna, felt more devastated with Voyager’s bankruptcy recently than in May, when he saw Luna plunge to close to zero from more than $80 in a week. Terra’s collapse was a huge blow, but “not everything was lost, and I knew I had to assume the risk,” Ruiz said. “I got other solid projects for the long term.” Ruiz, who says his portfolio is split between stocks and crypto, believes prices of some digital currencies will eventually go up.

It is one thing to face losses from one token, but another to see a centralized platform restrict access to all his crypto that is on it, Ruiz said. In the Voyager case, “I didn’t even know how to tell my wife,” Ruiz said. “She still doesn’t know.”

Ruiz has now lost faith in many cryptocurrency institutions. “I’m not planning to use exchanges anymore,” Ruiz said. “If I do, I’ll just buy say $1,000 or so bitcoin and then right away try to transfer back into another wallet that I want to keep my money there.”

Voyager offered interest of up to 12% annually to crypto depositors. Now, it’s in bankruptcy court. JUSTIN SULLIVAN/GETTY IMAGES

In Orlando, Fla., another 40-year-old Voyager customer has reached a similar conclusion. The investor, who works in information security, told MarketWatch he hopes to transfer all his crypto to an offline storage vehicle, or cold wallet, if he ever manages to retrieve his funds locked on the Voyager platform. The investor asked to remain anonymous because he is concerned about repercussions, saying that Voyager “is a company that I no longer trust. I don’t know what they’d do.”

The investor has more than $114,000 worth of bitcoin BTCUSD, -0.53%, ether ETHUSD, 0.27% and stablecoin USDC USDCUSD, -0.01% deposited at Voyager, roughly 80% of his family’s life savings. On July 1, when he received an email from Voyager that the company had halted user withdrawals, “my heart sank.”

“ I felt like a pain went through my body. I didn’t know what to say. I mean, thinking about it, it was the worst thing that ever happened,” the investor said. “Quite candidly, at times at night, I just wake up and cry. Because it’s such a disbelief to me. Like it’s one thing that you buy an asset and the asset goes down. It might pick up one day, and we still have access to it, right?”

In fact, back in March 2021, choosing to invest with Voyager was a “very careful” decision, according to the investor, after he compared several different platforms and did research about their management teams. Voyager was a publicly traded company listed on the Toronto Stock Exchange and the investor was able to find a lot of its financial information by reading its securities filings. “They were way solvent,” he thought. “Ratios were good. They had a good operating business. I also looked at their business model and the growth of the customer base,” the investor said. Meanwhile, the platform was “very intuitive, very easy” to use. It also marketed that all the U.S. dollar deposits were insured by the Federal Deposit Insurance Corporation, the U.S. government agency that backs depositors in American banks, which was a major appeal. Voyager had a partnership with Metropolitan Commercial Bank, a New York community bank.

Voyager recently assured investors that their U.S. dollar deposits will be returned in full, upon completion of a “reconciliation and fraud prevention process.” However, users who have crypto assets on the platform will instead receive a combination of some of their crypto, proceeds from any Three Arrows recovery, common shares in the newly reorganized company and Voyager’s own tokens VGX, according to the company’s restructuring plan, which is subject to change and requires court approval. 

Still, “who would want those utility token for the company that has lost all trust?” asked the investor. “If they ever come back up…who’s gonna come and do business with these people?” The company’s shares was equally unappealing for him. “I just want my principal back. I’m willing to forgo every interest that they give me.”

Representatives at Voyager did not respond to requests seeking comment.

At many, if not most crypto exchanges, customer funds are pooled together and not segregated, according to Daniel Saval, a partner at law firm Kobre & Kim. In the case of a bankruptcy filing, the issue becomes important to determine whether customers will be treated as unsecured creditors. If a customer is “unable to show that they have control over their accounts that they’re able to actually identify or trace their specific crypto assets, then most likely those assets are going to be considered property of the bankruptcy estate,” according to Saval. It means that the customers will share with all other creditors the pool of assets, instead of claiming what was in their accounts, Saval said.

In May, Coinbase COIN, the largest U.S.-based crypto exchange, added language to its securities filings that said in a bankruptcy situation “the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors.” The bankruptcy filing of Celsius Network on Wednesday in federal court in New York means that its customers are faced with becoming unsecured creditors in that case, with limited claims only to the general bankruptcy estate and not their specific accounts.

Maxwell McIntyre, a 39-year-old who works for the U.S. Department of Defense in Japan, has about $14,000 with Voyager. Most of the funds are in U.S. dollars, thanks to his decision to convert most of his USDC on the platform to dollars on June 20, a few weeks after Celsius stopped withdrawals.

McIntyre believes he will get the U.S. dollar deposits back, but as far as crypto, “I’m pretty much just expecting that to be lost at this point,” McIntyre said.

Overall, he feels that “we’ve been lied to quite a bit about all this.”

“Just a few weeks ago, we were being told that all our capital is great. They have plenty of capital and they don’t lend to any risky decentralized finance lenders,” McIntyre said. He also felt bad that he once recommended Voyager to his mother, his wife, and his children. He even helped his wife to set up an account, which is slated to be given to their kids — it has about $4,360 in it.

Nevertheless, McIntyre said his view on cryptocurrencies “hasn’t changed one bit.” He believes that crypto could be a “very powerful financial tool” with the potential to solve some world problems.

But he no longer has the same trust for centralized platforms. “I am definitely not going to keep it on an exchange just to earn the extra little bit of interest when that’s very possible I could lose it,” McIntyre said.

By Frances Yue

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