crying crypto coin with empty pockets
Illustration: Christopher T. Fong/Protocol

Crypto bankruptcies test the system

Protocol Fintech

Good morning, and welcome to Protocol Fintech. This Thursday: crypto takes a trip to bankruptcy court, ABG and Bolt settle, and Binance.US gets a CFO on its road to an IPO.

Off the chain

The Biden administration’s crypto rules will be shaped by no-coiners, under a legal advisory from the Office of Government Ethics. Even a de minimis exemption won’t apply to crypto holdings. The only exception is for holdings in a crypto-sector mutual fund of under $50,000. The ruling won’t change things for Tim Wu, a Biden tech adviser who’s already disclosed he’s a bitcoin millionaire, since he voluntarily recused himself from crypto policy matters.

— Owen Thomas (email | twitter)

Crypto takes a trip to bankruptcy court

About two months ago, when bitcoin was trading about 30% higher than it is now, Coinbase caused a stir by warning in an SEC filing that customers could lose their crypto assets if the exchange went bankrupt. CEO Brian Armstrong was able to calm things down, assuring customers that Coinbase was not at risk of bankruptcy. Still, the episode raised a thorny question: What happens to a customer's crypto if the company holding it goes under? Voyager’s bankruptcy filing this week will provide a real-world test.

Voyager's customers have been locked out of their accounts for nearly a week. The crypto broker and lender suspended trading, deposits and withdrawals on July 1, saying it needed time to look for “strategic alternatives” amid a massive market slump.

  • Voyager announced late Tuesday that it had filed for Chapter 11 bankruptcy in New York federal court, blaming, in part, the default by crypto hedge fund Three Arrows Capital on a loan worth more than $650 million from Voyager.
  • Voyager CEO Stephen Ehrlich said bankruptcy was the “best way to protect assets on the platform and maximize value for all stakeholders, including customers.” But the company's public statements and court filings make clear that it won't be a quick or easy process for customers to get their assets back.
  • Under the proposed plan, crypto holders will receive "a combination of the crypto in their account(s), proceeds from the [Three Arrows] recovery, common shares in the newly reorganized company and Voyager tokens." Three Arrows was ordered into liquidation earlier this month, meaning Voyager will have to battle it out in the courts with other creditors for part of the capital it is pledging to customers.

Cash deposits are frozen too. Voyager said that its bank partner, the Metropolitan Commercial Bank, is holding about $350 million in customer funds.

  • Metropolitan released a statement on its website that "Voyager customer funds … are insured by the FDIC," up to $250,000 per depositor. But the bank added that FDIC insurance is "available only to protect against the failure of Metropolitan Commercial Bank," not Voyager.
  • As writer and economist Frances Coppola wrote, Voyager described some of its products as FDIC-insured in the event of its own failure. It’s also not clear if “depositor” here means individual Voyager customers or Voyager itself, which maintains an omnibus account with the bank. Voyager said customers with U.S. dollar deposits will receive access after Metropolitan Commercial Bank's fraud prevention process is complete.
  • Voyager’s promotion of its bank partner’s FDIC insurance could cause it more grief. The FDIC recently issued rules for dealing with false or misleading advertising of the availability of deposit insurance.

Legal experts have long warned that a crypto bankruptcy would get messy for customers. “What can safely be predicted is that there will be litigation, and there will be delay,” as Adam Levitin, a law professor at Georgetown University who studies bankruptcy, told the Wall Street Journal in June.

  • Crypto bankruptcies are still a relatively uncharted legal territory. And exchanges and other intermediaries lack the federal deposit insurance of banks or the coverage offered by the SIPC to member brokers.
  • Stockbrokers are required to keep customer assets separate from their own accounts, offering protection in the case of a firm's insolvency. Without legal precedent for a crypto bankruptcy, Coinbase's Armstrong acknowledged in May that "it is possible, however unlikely, that a court would decide to consider customer assets as part of the company in bankruptcy proceedings."
  • Voyager reported more than 100,000 creditors in its bankruptcy filing, who will each fight for their share of what's available. That means that customers need to move quickly to assert their claim, said Daniel Saval, a bankruptcy attorney with Kobre & Kim. That could include seeking membership on an official creditors committee.

Voyager experienced a “run on the bank,” according to Ehrlich. It is far from the only company in such trouble. Celsius, which similarly offers customers high-interest accounts through a lending business, has blocked withdrawals for nearly a month now and has clashed with attorneys over whether to file for Chapter 11, according to The Block. Given the current state of the crypto space, “it is certainly a good time for customers to read the fine print of their user agreements,” Saval said. “How is your property going to be stored?” These questions will also stoke the push in Washington to put guardrails on crypto.

— Ryan Deffenbaugh (email | twitter)


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On the money

A fake job ad was the cause of the Axie Infinity hack. A senior engineer at the company reportedly applied for a job that did not exist. When a fake offer letter arrived, it contained spyware that allowed hackers to compromise the Ronin bridge.

GameStop’s board approved a four-for-one stock split. The decision is meant to appeal to retail investors, who have flocked to the meme stock as the game retailer unveiled plans to sell NFTs, and drove its shares up over 5% in extended trading.

The U.S. and South Korea are cooperating on crypto investigations. Officials from both jurisdictions met Tuesday to discuss ways to strengthen cooperation in financial crimes, and agreed to share investigation data, including data on Terraform Labs and its luna token.

ABG settled its lawsuit with Bolt. Authentic Brands Group, reportedly Bolt’s largest customer, settled and dismissed its lawsuit against the startup. It also became a shareholder, with plans to continue its partnership.

The Ethereum blockchain is closer to converting to proof of stake. In its quest to switch its consensus mechanism, developers completed a second testnet merge, the Sepolia Testnet, Wednesday. A third public testnet is planned before a mainnet switch.


Ripple CEO Brad Garlinghouse said the crypto company will move to another country if it loses in its legal battle with the SEC.

Garlinghouse said he’s confident that Ripple will prevail against the federal regulator, which accused the company of failing to register roughly $1.4 billion in XRP tokens as securities.

“We think the law is on our side and the facts are on our side,” he told Protocol. But “we will move to another jurisdiction if we lose the case in the United States. We still have an immense business to build. Why do it in a regulatory jurisdiction that’s not going to be friendly towards us?”

The SEC declined to comment.

The case, which is expected to drag on until early next year, could have far-reaching implications for the crypto industry. The SEC, led by Chair Gary Gensler, has argued that many cryptocurrencies should be subject to the strict reporting and registration rules that apply to securities.

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— Benjamin Pimentel (email | twitter)

Moves and hires

Binance.US has named Jasmine Lee as its CFO. The hire of the Acorns COO provides another signal that the crypto broker is pursuing an IPO.

U.K. Chancellor of the Exchequer Rishi Sunak and Economic Secretary to the Treasury John Glen stepped down from Boris Johnson’s government ahead of the prime minister’s resignation. The two officials had been leading a campaign since April to make the nation more crypto-friendly.

Samir Shah has been named chief operating officer at Pantera Capital. Shah previously spent 12 years at J.P. Morgan, including as head of asset management sales.

Shah isn’t the only J.P. Morgan banker making the crypto leap. Eric Wragge is joining Algorand as head of business development and Puja Samuel is joining Digital Currency Group as head of corporate development, CoinDesk reported.

Jason Fung has launched a blockchain gaming startup called Meta0. He was formerly TikTok's head of gaming.

The U.K.'s Financial Conduct Authority has hired Matthew Long to lead a new crypto and payments unit. Long previously led the U.K. Financial Intelligence Unit.

Shariq Rizvi, Reddit’s executive vice president of ad monetization, has joined the board of directors of Cushion. The startup provides bill pay and bank fee negotiation software.


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