‘I just woke up and cried’: Voyager and Celsius bankruptcies destroyed some crypto investors’ trust in centralized platforms

Yotsy Ruiz recently purchased his very first crypto hardware wallet – a Nano X from Ledger. He transfers all his crypto holdings that he can still move to the small physical device which looks like a thumb drive, and a far cry from large centralized exchanges such as Binance and Coinbase.

The 40-year-old Frederick, Maryland resident, who owns a home improvement business, hastily moved after crypto broker Voyager Digital, whom he trusted with some of his savings, froze all user withdrawals in early July and filed for bankruptcy protection.

In November, Ruiz invested around $33,000 worth of crypto on the Voyager platform. Its holdings, including more than 11,110 Cardano ADAUSD,
+0.07%
and 360,000 LUNAUSD Terra Luna Classic,
-1.05
among others, are today worth around $5,000 as crypto prices have fallen. Now, it’s unclear if Ruiz will ever get his parts back.

“Sometimes you want to buy parts like Shiba Inu SHIBUSD,
0.20,
you want to buy Dogecoin DOGEUSD,
-0.12,
people tell you, ‘no, no, don’t buy this, these are bad products and you can lose money.’ But then you trusted those exchanges. You lost not just a coin, but all the money there,” Ruiz said in an interview with MarketWatch.

Voyager said he signed up more than 3.5 million users as of March 31, offering high interest rates reaching up to 12% on their crypto deposits and connecting clients to crypto exchanges and market makers for trading. It also partnered with Mastercard on a USDC stablecoin-backed debit card that gave rewards of up to 9% per year. 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 into liquidation by a court in the British Virgin Islands, has defaulted on more than $650 million in loans to the company.

With the cryptocurrency crash, several companies like Voyager and Celsius Network that emerged over the go-go years to offer digital currency investors lightly regulated financial and banking services have collapsed. As bitcoin traded 70% below its all-time high and smaller coins fell even further, crypto lender Celsius, which said it has more than 1.7 million customers, halted all customer withdrawals in June and filed for bankruptcy on Wednesday. Now, Celsius clients face being unsecured creditors in federal bankruptcy court in New York. Digital asset exchange CoinFlex has also suspended customer withdrawals. These failures have shaken investor confidence in many companies that underpin a fledgling industry that has attracted huge inflows of capital.

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Ruiz, who also invested in Terra’s Luna Classic, formerly known as Luna, felt more devastated by Voyager’s bankruptcy recently than in May, when he saw Luna plunge to near zero from over $80 in a week. Terra’s collapse was a blow, but “all was not lost, and I knew I had to take the risk,” Ruiz said. “I have other solid plans for the long term.” Ruiz, who says his portfolio is split between stocks and crypto, believes the prices of some digital currencies will eventually rise.

It’s one thing to face losses of a token, but quite another to see a centralized platform restricting access to all of its cryptos 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’s has now lost faith in many cryptocurrency institutions. “I don’t plan on using trades anymore,” Ruiz said. “If I do that, I’ll just buy, say, about $1,000 worth of bitcoins, then I’ll try to transfer to another wallet right away that I want to keep my money there.”

Voyager offered interest of up to 12% per annum to crypto depositors. Now it’s in bankruptcy court.

Justin Sullivan/Getty Images

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

Investor has more than $114,000 worth of bitcoin BTCUSD,
+0.52%,
ether ETHUSD,
+0.54%
and stablecoin USDC USDCUSD,
+0.01%
deposited with Voyager, about 80% of his family’s lifetime savings. On July 1, when he received an email from Voyager informing him that the company had halted user withdrawals, “my heart sank.”

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

In fact, in March 2021, choosing to invest with Voyager was a “very prudent” decision, according to the investor, after comparing several different platforms and researching their management teams. Voyager was a publicly traded company listed on the Toronto Stock Exchange and the investor was able to find much of its financial information by reading its securities documents. “They were very solvent,” he thought. “The ratios were good. They had a good operating business. I also looked at their business model and customer growth,” the investor said. Meanwhile, the platform was “very intuitive, very easy” to use. He also announced that all US dollar deposits were insured by the Federal Deposit Insurance Corporation, the US government agency that supports depositors in US banks, which was a major draw. Voyager had a partnership with Metropolitan Commercial Bank, a community bank in New York.

Voyager recently assured investors that their US dollar deposits would be fully returned to them, following 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, the proceeds of any recovery from Three Arrows, common stock in the newly reorganized company, and own tokens. Voyager’s VGX, according to the company’s restructuring plan, which is subject to change and requires court approval.

Still, “who would want these utility tokens for the company that has lost all trust?” asked the investor. “If they ever come back… who’s going to do business with these people?” The company’s stock was also unattractive to him. “I just want my principal back. I’m willing to give up any interest they give me.

Representatives for Voyager did not respond to requests for comment.

According to Daniel Saval, a partner at law firm Kobre & Kim, in many, if not most, crypto exchanges, client funds are pooled, not segregated. In the case of a bankruptcy filing, the issue becomes important in determining whether customers will be treated as unsecured creditors. If a client is “unable to show control of their accounts, they are able to identify or trace their specific crypto assets. Then most likely, those assets will be considered property of the bankruptcy estate,” according to Saval This means clients will share the pool of assets with all other creditors, instead of claiming what was in their accounts, Saval said.

In May, Coinbase COIN, the largest US-based crypto exchange, added language to its securities deposits it says in a bankruptcy situation “the crypto assets we hold on behalf of our customers could be subject to bankruptcy proceedings and those customers could be treated as our general unsecured creditors”. Celsius Network’s bankruptcy filing in federal court in New York on Wednesday means its customers face becoming unsecured creditors in the case, with claims limited only to the general bankruptcy assets and not their accounts. specific.

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

McIntyre thinks he’ll get US dollar deposits back, but when it comes to crypto, “I pretty much expect that to be lost at this point,” McIntyre said.

Overall, he feels “we’ve been lied to a lot about all of this”.

“Just a few weeks ago, we were told that all our capital is great. They have a lot of capital and they don’t lend to any subprime decentralized finance lenders,” McIntyre said. He also felt bad for once recommending Voyager to his mother, wife, and children. He even helped his wife create an account, which should be given to their children – it contains around $4,360.

Nonetheless, McIntyre said his view on cryptocurrencies “hasn’t changed at all.” He thinks crypto could be a “very powerful financial tool” with the potential to solve some global problems.

But he no longer has the same confidence for centralized platforms. “I’m definitely not going to keep him on a trade just to earn some extra interest when it’s very possible I could lose him,” McIntyre said.

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