Voyager Digital Holdings, Inc. – Looking to Boost Customer Morale and Platform Integrity, Debtors Look to Allow Customers to Access Their Cash Deposits BUT Also to Liquidate Customer Cryptocurrency Where Customer Cash Balances Are Negative

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July 15, 2022 – The Debtors filed a motion requesting an order that would authorize them 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. 73].

As it stands, the motion is not scheduled to be heard for over 2 weeks (ie on August 4th), a period during which the Debtors will undoubtedly get a lot of customer feedback as to whether these measures to "unfreeze" normal crypto banking operations have the desired impact of increasing customer morale and platform integrity. That may very well be the case in respect of holders of cash deposits at MC FBO who will now be able to withdraw their cash, but unlikley to be as warmly welcomed by those whose frozen status includes a positive cryptocurrency balance and a negative cash balance. They may now see their cryptocurrency liquidated at fire-sale prices (will the Debtors hold onto those coins for a less rainy day?) to cover their negative cash positions.

More globally, however, the motion feels like a massive game of crypto chicken (will HODL beat the death spiral?), with the Debtors having at least the advantage of running this possibility up the flag pole before perhaps deciding to chicken out (or having the Court, wary of the uncertain reality/optics of a run on the bank occurring during its watch). It might take a brave judge/Court to embrace a motion that refers to the "ordinary course" of a crypto brokerage more than 20 times in the motion.

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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