Voyager Digital Holdings, Inc. – Court Rules that Crypto-Currency Broker Can Return Customer Cash (Given It Is Not Estate Property) with Consideration as to Ownership of Cryptocurrency Assets Deferred

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August 5, 2022 – The Court hearing the Voyager Digital Holdings cases issued an order authorizing the Debtors to: (i) honor customer withdrawals in respect of customer cash held at Metropolitan Commercial Bank (“MC FBO”), (ii) liquidate cryptocurrency from customer accounts with a negative balance, (iii) sweep cash held in third-party exchanges, (iv) conduct ordinary course reconciliation of customer accounts, and (v) continue to stake cryptocurrency [Docket No. 247].

Please see also our in-depth August 4th coverage of the hearing at which this order was considered.

The order reads, “The Debtors are authorised to reinstate that ordinary course practices with respect to: (a) liquidating cryptocurrency for customer accounts with a negative USD balance(b) sweeping cash held in third party exchanges, (c) reconciling customer records to reflect the status of accounts as of the commencement of these cases (including but not limited to, reconciliations to reflect transactions that were fulfilled or partially fulfilled prior to the commencement of these cases), (d) closing account that are unfunded and/or deemed to be fraudulent; € disabling user access to closed accounts; and (f) recovering funds that were sent to incorrect block chains. To the extent that customers placed orders that were not filled or that were only partially filled prior to the commencement of these cases, the Debtors are authorized to cancel the portions of such orders that were not filled.

As to staking, the order adds: "The Debtors may “stake” cryptocurrency pursuant to their ordinary course practices as they deem appropriate in the ordinary course of business; provided, however, that the Debtors shall give seven (7) business days’ written notice (the 'Staking Notice') to the Committee prior to staking or unstaking cryptocurrency. The Staking Notice shall include information sufficient to allow the Committee to evaluate the proposed staking and unstaking, including, without limitation, the staking protocol, the smart contract address, anticipated yield, the cryptocurrency to be staked, the cryptocurrency or fiat the Debtors propose to convert to stake, staking mechanics, lock-up period, transaction fees, actions required to unstake, and the involvement of any third-party and their respective fees."

In a recent press release, the Debtors states, “We anticipate resuming access to the Voyager app for cash withdrawals only, starting on Thursday, August 11th. Customers with cash (US dollars) in their accounts will receive an email with more details before cash withdrawal access in the app becomes available. We anticipate customers will receive their funds in about 5-10 business days after making their requests.

Requests will be processed as quickly as possible but will require some manual review, including fraud reviews and account reconciliation, and timing will depend, in part, upon the individual banks to which customers transfer their cash. Once cash withdrawals are enabled, customers can withdraw up to $100,000 via the app/ACH in a 24-hour period.”

In a separate filing [Docket No. 250], Judge Wiles outlined his rationale for allowing the cash withdrawals before making clear that the (much) tougher issue of cryptocurrency ownership reamins to be decided and that his decision may have limited precedential value in other crypto cases. On cash withdrawals his decision notes: "The Debtors argued, among other things, that the funds that are actually on deposit in the FBO accounts belong directly to Voyager’s customers and are not property of the Debtors’ bankruptcy estates. The Official Committee of Unsecured Creditors (the 'Committee'), and MC Bank, have filed papers in support of this request for relief, and no party in interest has opposed the relief. During a hearing on the motion held on August 4, 2022 (the 'Hearing'), the Committee and MC Bank concurred with the Debtors’ contentions that the funds in the relevant bank accounts belong to customers and are not property of the estates

The Customer Agreement that governs the Debtors’ relationships with customers, as updated through January 7, 2022, was submitted as an attachment to the Debtors’ motion. [ECF No. 73.] The Customer Agreement has different provisions regarding the manner in which cash and cryptocurrency will be held. With respect to cash, paragraph 5(A) of the Customer Agreement states that customers may deposit cash that will be held in an omnibus account at MC Bank. More particularly, it states:

Cash deposited into the Customer’s Account is maintained in an omnibus account at Metropolitan Commercial Bank (the 'Bank'), which is a member of the Federal Deposit Insurance Corporation ('FDIC'). Voyager maintains an agreement with the Bank whereby the Bank provides all services associated with the movement of and holding of USD in connection with the provision of each account. Therefore, each Customer is a customer of the Bank. All U.S. regulatory obligations associated with the movement of, and holding of, USD in connection with each Account are the responsibility of the Bank. For purposes of clarity, any services pertaining to the movement of, and holding of, USD are not provided by Voyager or its Affiliates. Cash in the Account is insured up to $250,000 per depositor by the FDIC in the event the Bank fails if specific insurance deposit requirements are met.

The Debtors have argued that the Debtors have no legal or equitable rights to the funds in the FBO accounts. They have further contended that even if the Debtors had legal title to the funds in the FBO accounts that would be insufficient to permit those funds to be treated as property of the Debtors’ estates, since the Debtors have no equitable or beneficial interests in such funds.

Based on the foregoing, and for the reasons stated at the Hearing, the Court has determined that customers should be permitted to withdraw funds actually held for them in the two FBO accounts at MC Bank, and that such funds are not property of the Debtors’ bankruptcy estates."

On cyptocurrency ownership, Judge Wiles adds: "The Debtors have contended that, pursuant to these terms, customers have only the rights of general unsecured creditors with respect to their cryptocurrency holdings. That particular contention has not been challenged at this stage of these cases and is not before the Court in connection with the present motion."

Judge Wile's decision concludes: One final word of caution: I am aware that the treatment of cash and cryptocurrency in this and similar cases is a subject of avid interest among investors and insolvency attorneys, and that similar issues may arise in other cases. These chapter 11 cases are somewhat unusual, in that the overwhelming percentage of claims are held by customers, with very few other creditors. As a result, there really were no parties before the Court who had any strong financial interests in disputing the relief sought with respect to the FBO accounts, or in presenting any competing arguments or facts as to how the funds in the FBO accounts should be treated. Other courts who may be presented with similar issues therefore should understand, not only that my decision in this case is based on the particular agreements that have been presented to the Court, but also that my decision has been rendered without the kind of vigorous opposition by competing creditors that may be present in other cases. This decision is not intended to be a ruling as to the rights  that customers might have in cryptocurrency cases generally, or as a ruling on any issues that competing creditors might raise in other cases."


The Debtors motion provides: "On July 1, 2022 (the 'Freeze Date'), the Debtors made the difficult decision to halt their trading services and freeze all withdrawals from the Debtors’ platform to preserve customer investments, avoid irreparable damage to the Debtors’ business, and ensure equal treatment of all customers. Prior to the Freeze Date, the Debtors managed various functions on their cryptocurrency platform in the ordinary course of business, including, but not limited to, honoring
customer withdrawals from the MC FBO Accounts, liquidating cryptocurrency from customer accounts with negative balances, sweeping cash held in third-party exchanges, conducting ordinary course reconciliation of customer accounts, and staking cryptocurrency (together, the 'Cryptocurrency Transactions'). By this Motion, the Debtors are seeking authority to engage in the Cryptocurrency Transactions as more fully set forth herein."

On MC FBO Accounts

The motion provides: "By this Motion, the Debtors are seeking authority to continue honoring customer withdrawals from the MC FBO Accounts on a go-forward basis. The Debtors have determined, in their business judgment, that failure by the Debtors to honor withdrawals any longer could materially harm customer morale during these chapter 11 cases. Reinstating access to withdrawals will alleviate customer concerns that access to their cash held in the MC FBO Accounts, and the integrity of the platform, is restored.

On Liquidating Customer Cryptocurrency Assets

"Consistent with past practice, the Debtors have also historically liquidated cryptocurrency assets from customer accounts that hold a negative U.S. dollar balance and swept such cash into the Debtors’ operating accounts. Each day that an account with a negative balance is not liquidated, it subjects the Debtors to the risk of price depreciation in the cryptocurrency. For instance, if a customer has $5,000 in cryptocurrency and a negative -$5,000 USD balance in their account today,
liquidating their cryptocurrency will generate all cash needed to cover the debit balance, adding the full value of the shortfall back into the Debtors’ estates. However, if tomorrow the cryptocurrency is worth $4,000, upon liquidation, the Debtors would only receive 80% of the shortfall of USD. Given the current market volatility, having the authority, but not the obligation, to liquidate customer accounts with a negative balance will serve to protect and preserve estate assets for the benefit of all customers. Therefore, the practice of liquidating cryptocurrency from negative customer accounts promotes the healthy operation of the Debtors’ platform and will inject further liquidity into the Debtors’ business, thereby promoting the Debtors’ ability to fund these chapter 11 cases."

On "Staking"

Prior to the Freeze Date, the Debtors 'staked' cryptocurrencies on behalf of their customers. Staking cryptocurrency is not equivalent to lending cryptocurrency, and is a key way that cryptocurrency companies both generate income and also facilitate growth of other companies in the cryptocurrency industry. Staking is a way to earn passive interest on cryptocurrency by 'staking' cryptocurrency on the blockchain for a fixed period of time during which such cryptocurrency cannot be withdrawn…. The deposited cryptocurrency assets are then used to verify transactions on the blockchain.

The 'blockchain' is a digital technology that vets and verifies transactions through a rigorous mathematical process. Put simply, cryptocurrencies do the 'work' of the blockchain by acting as a medium of exchange on the blockchain and, ultimately, are used to verify transactions on the blockchain. Accordingly, it is critical for a blockchain project to have enough cryptocurrency on hand to facilitate transactions and keep the blockchain “running.” Too many transactions, and not enough cryptocurrency on hand to process them, disrupts the ability of the blockchain to function.

The cryptocurrency is used on the blockchain and in no way is used to fund the Company’s business operations. Staking simply helps the blockchain 'work' and continue to process transactions….by this Motion, the Debtors are seeking authority to reinstate its staking
practices on a postpetition basis in the ordinary course of business."

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