Chapter 16 of the book Reckless: The Story Of Cryptocurrency Interest Rates is published below. The full book is available on Amazon. The book was written before the bankruptcy of FTX and therefore does not include coverage of this event. However, the book does provide useful commentary in the run up to the failure of FTX, which provides context for the eventual calamity.
Voyager
Another leading earn platform, Voyager, is somewhat unique, in that it was a public company. The company was listed in Canada. Therefore, Voyager’s quarterly financial statements are available for financial analysts to evaluate and the level of disclosure is much higher than for other earn platform entities. Voyager was also a large 3AC creditor, the largest 3AC earn platform creditor and this resulted in the Voyager’s bankruptcy.
Before the collapse, at the end of March 2022, Voyager’s balance sheet was around US$6 billion in size. The company had crypto assets payable to customers of US$5.5 billion (or US$5.7bn of liabilities when including cryptocurrency is held as collateral). This resulted in a positive equity position of US$257 million. This was a leverage ratio of 23.3 to 1, or in other words a write down of 4.3% of the assets would wipe out all the group’s equity, which feels quite risky given the risk profile of the assets.
It is important to clarify the types of risks these earn platforms need to manage. There are four primary asset management risks:
- Asset matching: Given the high volatility in cryptocurrency prices, it is important the value of coins in the assets and liabilities match. For example, taking customer deposits in a volatile dog meme coin like Dogecoin and converting this to USDC so that the Dollars can be lent out and earn a yield is very risky.
- Duration risk: It is important the duration of the assets are not too long compared to the duration of the liabilities. Customer deposits grew very quickly and therefore it is probably good to assume they could be quickly withdrawn in certain scenarios. The earn platforms need to ensure that they have sufficient liquidity on hand to meet withdrawals and that the assets are not locked up in protocols or lent out for long durations. If the mismatch is too large, the platform could have insufficient liquidity and be unable to process withdrawals.
- Counterparty risk: The earn platform needs to ensure that it has sufficient diversification with respect to its credit counterparties. Ideally, the platform should not be too exposed to any one borrower, such that if the largest borrower defaults the platform is still solvent.
- Interest rate spread: It is also sensible to ensure that interest rates are set such that there is a positive spread between the average lending rate and the average deposit rate, such that the company is profitable and able to build equity.
In general, in this crisis, the most common mistake the earn platforms made was having inappropriate risk controls with respect to both asset duration and managing counterparty exposure. A negative net interest margin was also a common mistake.
With the details provided by Voyager in their quarterly disclosures, one is able to dig further into the earn business model. Voyager disclosed the details of the cryptocurrency liabilities due to its customers by coin, as well as the coins it held under its own custody system. The company also disclosed the coins it loaned out. This data is summarised in the table below.
Voyager Balance Sheet Data – As at 31 March 2022 – US$ millions
| Customer Deposits | Assets Held | Loaned Out | Earn Rate | |
| Bitcoin | 1,496 | 1,146 | 379 | 4.1% |
| USDC | 842 | 167 | 633 | 9.0% |
| Ethereum | 801 | 196 | 629 | 4.3% |
| Cardano | 307 | 311 | 4.0% | |
| Voyager Coin | 295 | 307 | 7.0% | |
| Shiba Inu | 245 | 211 | 1.0% | |
| Luna | 218 | 212 | 4.0% | |
| Dot | 137 | 135 | 12.0% | |
| Solana | 101 | 101 | 3.0% | |
| Others | 1,040 | 859 | 169 | |
| Total | 5,482 | 3,433 | 2,022 |
Source: Voyager financial statements, https://web.archive.org/web/20220227113941/https://www.investvoyager.com/earn
Note: Earn rate as at the end of February 2022
The data indicates that while Bitcoin was the most popular asset for customers, USDC and Ethereum appear to have been the easiest assets to deploy and loan out, due to demand to borrow these tokens. 76% of the client Bitcoin remained static inside Voyager, the comparable figure for Ethereum was just 24%. In contrast, highly speculative alternative coins such as Shiba Inu (A dog meme related coin) and Voyager Coin (The native token of its own platform), did not appear to be lent out at all. This is likely due to a lack of demand from borrowers and a lack of utility of these coins. As a result of this, the customer earn rate on Shiba Inu was low, at 1% in March 2022. However, it is not clear how this 1% yield was funded. The exception here is Luna, which was almost 100% loaned out.
Cardano, Dot and Solana are proof of stake blockchains. Therefore, the coins could be used for staking and earn a yield natively on their own blockchains, without being lent out. These staking networks normally have a fixed withdrawal period, of say a few weeks, therefore managing the duration of these assets is relatively simple.
Voyager also provided a breakdown of the borrowers and a range of interest rates they could obtain, without disclosing the names of the entities. This data is summarised in the table below.
| Borrower | Interest Rate | Amount – US$m |
| BVI based counterparty | 1.0% to 7.5% | 728 |
| Singapore based counterparty | 2.0% to 9.0% | 326 |
| US based counterparty | 4.0% to 13.5% | 295 |
| UK based counterparty | 1.0% to 15.0% | 252 |
| Canada based counterparty | 1.0% to 30.0% | 141 |
| US based counterparty | 0.5% to 8.9% | 119 |
| US based counterparty | 1.0% to 10.0% | 35 |
| Other | 125 | |
| Total | 2,022 |
Source: Voyager financial statements
Note: Data as at 31 March 2022
The counterparty concentration risk did seem high. If any one of the top four counterparties failed, Voyager was at risk of insolvency. It is now known that the largest counterparty, with a US$728 million loan balance, was 3AC. Amazingly, 3AC appears to have been given unsecured credit. This means that 3AC did not need to post any asset as collateral. This is in contrast for example, to the loans provided to 3AC by Genesis, which had 80% collateral. BlockFi also lent 3AC money before the insolvency, however these loans were over collateralised, perhaps at 133%. Over collateralisation is necessary due to the volatility of the underlying assets. Lending 3AC such a large proportion of the balance sheet, in an unsecured way, appears to be extremely irresponsible. In the crisis, in May and June 2022, concerns were raised about Voyager’s solvency and there was a deposit run.
On 18th June 2022, it was announced that a US$200 million and 15,000 Bitcoin credit line may be provided to Voyager by Alameda Research, with a 5% interest rate. Alameda Research is the trading arm of the cryptocurrency exchange FTX. Alameda was regarded as a large, sophisticated and successful proprietary trading shop. The trading shop is said to have made up to ten times more money than FTX in 2021, up to US$10 million per day in some periods. However, these were only rumours and the profitability of Alameda was never clear. The “non-binding” credit line with Alameda was designed to give depositors confidence and perhaps stop the panic. It could also provide much needed liquidity. However, the announcement said the agreement was not definitive. Ultimately the announcement did not work. On 1st July 2022, Voyager announced that it was suspending withdrawals, blaming the default of 3AC and “market conditions”.
Voyager, announced it is temporarily suspending trading, deposits, withdrawals and loyalty rewards, effective at 2:00 p.m. Eastern Daylight Time today. “This was a tremendously difficult decision, but we believe it is the right one given current market conditions,” said Stephen Ehrlich, Chief Executive Officer of Voyager. “This decision gives us additional time to continue exploring strategic alternatives with various interested parties while preserving the value of the Voyager platform we have built together. We will provide additional information at the appropriate time.” Voyager previously announced that its subsidiary, Voyager Digital LLC, issued a notice of default to Three Arrows Capital (“3AC”) for failure to make the required payments on its previously disclosed loan of 15,250 BTC and $350 million USDC. Voyager is actively pursuing all available remedies for recovery from 3AC, including through the court-ordered liquidation process in the British Virgin Islands.
A few days later, on the 5th July 2022, the company announced that it had started the bankruptcy process. On 26th September 2022, Voyager announced that FTX had won an auction to acquire the cryptocurrency assets of the company for US$1.4 billion. At the time the fair market price of the assets was US$1.3 billion and the loan to 3AC was excluded from the purchase. This deal should provide liquidity to distribute assets to Voyager’s creditors. Alameda Research was revealed to be the largest creditor of Voyager, with an unsecured US$75 million loan. Alameda also returned US$200 million of crypto assets to Voyager on 12th September 2022 and in return Voyager released collateral in the form of tokens associated with FTX, such as the exchange’s FTT token. This loan deal originated in September 2021. With this existing complex relationship with FTX, with a web of loans in both directions, it perhaps made sense that FTX helped provide the group with liquidity during the bankruptcy. Such a complex relationship with FTX did appear to be a little strange, however at the time not many people questioned FTX’s solvency.
After the Voyager bankruptcy, many of the depositors indicated that they believed Voyager had behaved in an unethical manner and misled investors. Legal action was launched by depositors who made several accusations.
- The lawsuit alleges that Voyager claimed to offer 100% commission free trading, but actually charged “exorbitant hidden commissions on every cryptocurrency trade”.
- The lawsuit also alleges that Voyager had an inappropriate partnership with the Dallas Mavericks Basketball team which is owned by Mark Cuban. The plaintiff’s claim that in a video conference with fans, Mark Cuban said the “Voyager platform makes the process [of investing in digital currencies] easy and simplified for fans of all ages”. Which the plaintiff argues was inappropriate promotion to those with “limited funds and experience”.
Voyager has also been accused of making misleading statements about the degree to which their customers were protected by FDIC insurance. In a now deleted Tweet from November 2020, Voyager stated:
Have you heard? USD held with Voyager is FDIC insured up to $250K. Our customers’ security is our top priority. Start growing your crypto portfolio today.
After the bankruptcy, The Federal Reserve put out a press release with a warning, indicating that the statement from Voyager about the FDIC insurance may be misleading.
Voyager and certain officers and employees made various statements online, including on its website, mobile app, and social media accounts, stating or suggesting that: Voyager itself is FDIC-insured; Customers who invested with the Voyager cryptocurrency platform would receive FDIC insurance coverage for all funds provided to, and held by, Voyager, without reference to the insured depository institution account; and The FDIC would insure customers against the failure of Voyager itself. These representations are false and misleading.
At the time of writing, Voyager’s reputation appears to be in tatters and customers are understandably furious at the management team. However, Voyager was not the only earn business to fail.
Other Insolvent Earn Platforms
In the aftermath of the crash, bankruptcies and financial contagion, several other earn businesses suspended withdrawals. This book will not cover all of them in detail. Other earn platforms which failed include Babel and Hodlnaut:
- Babel – Hong Kong based Babel Finance suspended withdrawals on 17 June 2022. At the end of 2021, the platform is said to have had customer deposits of over US$3 billion. Just one month before the suspension of withdrawals, Babel raised US$80 million in funding at a US$2 billion valuation.
- Hodlnaut – On 8th August 2022, the Singapore based firm announced it was suspending withdrawals. On 30th August, the firm was placed in bankruptcy. On 16th June 2022, the company announced that it had zero exposure to 3AC. Hodlnaut is believed to have had client assets in the US$350 million range. In April 2022, Hodlnaut added support for UST deposits, offering a yield of 13% of 14% if the funds were locked up for 180 days. The company is said to have had exposure to Anchor and UST and therefore became insolvent. Just a few months prior to this, in March 2022, Hodlnaut received an In-Principle Approval (IPA) from the Monetary Authority of Singapore (MAS) for a Major Payment Institution License.
Other smaller earn platforms that suspended withdrawals include Vauld, Freeway and BlueBenx.
CoinFlex
Another company that suspended withdrawals during the period was the cryptocurrency derivatives exchange CoinFlex. However, it is difficult to characterise this as an earn related collapse. If anything, Coinflex’s problems can be seen as a remnant of the 2017/18 era issues facing the cryptocurrency space, namely The Blocksize War.
On 23rd June 2022, CoinFlex announced that it was suspending withdrawals, due to “extreme market conditions last week & continued uncertainty involving a counterparty”. The company indicated that the counterparty was not 3AC. Then on the 27th June 2022, CoinFlex put out another astonishing statement, which indicated the following:
- The exchange was insolvent, because one large customer had used leverage and gone into negative equity.
- In normal circumstances, CoinFlex would not allow such a negative balance and would liquidate the position, however, this individual had a “non-liquidation recourse account” due to “stringent personal guarantees”.
- As a solution, repeating the Bitfinex playbook of 2016 and 2019, CoinFlex was to launch a recovery token, rvUSD, to monetize this individual’s debt.
It quickly emerged that this individual was Roger Ver, one of the early investors in CoinFlex. In a kind of joke, the “rv” stood for both “recovery value” and Roger Ver. It appeared to emerge that the debt was related to a large margin long position on a coin called Bitcoin Cash, believed to be as large as 0.5 million coins. By 9th July 2022, CoinFlex indicated that the position was liquidated, resulting in a shortfall of US$84 million. This debt was so large that the exchange did not have enough liquidity to process withdrawals. For his part, Roger Ver denied owing the exchange any money, stating on Twitter:
Recently some rumours have been spreading that I have defaulted on a debt to a counterparty. These rumours are false. Not only do I not have a debt to this counterparty, but this counter-party owes me a substantial sum of money, and I am currently seeking the return of my funds.
It seems that both sides may have had a different interpretation of the terms of the special non-recourse account. Bitcoin Cash was a token which spun-off from Bitcoin in 2017, after a long and confrontational dispute and Roger Ver had been a key advocate for the new coin. CoinFlex was an exchange which was a significant supporter of Bitcoin Cash. In an unexpected final chapter to the five year old dispute in Bitcoin, one of the main characters on the Bitcoin Cash side, appears to have been hit by the market turmoil of 2022. Roger Ver certainly put his money where his mouth was, still attempting to maintain a margin long position in Bitcoin Cash all these years later. However, some market participants may argue it was not fair that his account was special and couldn’t be liquidated, resulting in him having a potential advantage over the traders on the other side of the book to him. At least the existence of such an account should have been disclosed to the traders.
In the crisis, the darling of the earn industry, BlockFi, certainly performed better than rival platforms such as Voyager. BlockFi said it had no outstanding positions with 3AC. It did lend to 3AC in the past, however these positions were over collateralised. BlockFi also announced it was totally out of the GBTC trade. BlockFi had been a major player in the GBTC trade in the past, however with GBTC trading at a discount this trade was no longer possible.
BlockFi was still in a serious crisis though, because due to the failure of other earn platforms, its customers were panicking and withdrawing. In the heart of the storm, the CEO Zac Prince said in an interview that BlockFi received withdrawal requests amounting to 10% of the deposit balance per day. However, BlockFi was able to handle this without suspending withdrawals.
To try and put a stop to the panic, just like Voyager, BlockFi announced a deal with FTX. On 21st June 2022, Zac Prince announced the following on Twitter:
Today @BlockFi signed a term sheet with @FTX_Official to secure a $250M revolving credit facility providing us with access to capital that further bolsters our balance sheet and platform strength.
This was a week after the announcement of the revolving credit line between Alameda and Voyager. Again, this announcement appeared to be a move designed to calm depositors, but the agreement with FTX did not appear to be fully executed. FTX had established itself as a lender of last resort to troubled cryptocurrency lenders. Rightly or wrongly, FTX was regarded as one of the most profitable companies in the space and it had taken on an almost central bank type role, apparently for the good of the industry.
Some of BlockFi’s investors regarded the deal with FTX as controversial. Another investor in BlockFi, Morgan Creek, was trying to raise capital for a rival bailout offer. According to a partner at Morgan Creek, the FTX credit line gave FTX the option to buy BlockFi “at essentially zero price”, which would wipe out all other equity investors. This perhaps indicates that BlockFi was worried about liquidity and failing to meet withdrawal requests. This was emergency funding and protecting depositors, rather than investors in BlockFi equity was the priority. On 1st July 2022, BlockFi finally agreed terms with FTX. The eventual size of the revolving credit facility was US$400 million. This deal is also said to have included the option for FTX to acquire the company, at a value of around US$150 million, according to the Financial Times. This deal did protect depositors, however for BlockFi investors, who had valued the company at up to US$4.5 billion, this was surely a painful moment. With the company raising US$1 billion in investor capital, it is quite remarkable that BlockFi seemed to run out of cash so quickly. This is probably partly explained by a duration mismatch in BlockFi’s assets and liabilities.
At the end of August 2022, SBF implied in an interview with Bloomberg that the bailouts had mixed results.
I think some were going to turn out to be profitable, some won’t be. We had to make snap judgement calls. With Voyager, I think there’s $70 million there that we put in that I’m not sure we’re ever seeing again. [BlockFi] just sort of burned through their runway, had a functional business with a strong team and just needed more cash to be able to operate effectively going forward.
SBF is said to have indicated that perhaps he regrets the Voyager bailout, however he was happy with the decision to bailout BlockFi. As to whether FTX really had the balance sheet strength to bail out BlockFi, this was an open question.
Is The Earn Model Over?
In the aftermath of the crisis, a key question many have asked is: Is the earn model dead? It seems likely the answer here is no, at least not completely dead. The more conservative companies in the space such as Ledn survived. Maple also survived relatively intact. Unchained Capital, which was even more conservative seemed to be almost completely unscathed by the crisis. The old 2018 Bitcoin as collateral thesis remains intact, some Bitcoin investors still want to borrow US Dollars to spend on houses and cars, while avoiding capital gains tax. At the time of writing, the platforms which did not suspend withdrawals are by and large still open and still offering decent interest rates. BlockFi for example is still open. However, the size of the balance sheets of these organisations has shrunk dramatically and it is unlikely we will see exponential growth again, at least for a few years.
What Happened to Do Kwon?
In September 2022, the Luna and UST founder Do Kwon had an Interpol Red notice issued against him. Kwon is said to have fled South Korea in the summer of 2022 and then moved to Singapore. However, after the Interpol notice was issued there were rumours Mr Kwon fled Singapore. His current location is unknown and he has refused to confirm his location. Mr Kwon is also questioning the legitimacy of the Interpol notice, arguing that cryptocurrency is not regulated in South Korea and the government had previously argued this themselves to improve its electability. Therefore, Kwon has said he believes the legal proceedings are politically motivated and implied he may not turn himself in in Korea, at least at this point in time.
While Do did appear to behave in a reckless manner, it is perhaps not fair to blame him for the entire crisis. It is true Luna and UST collapse was the catalyst that set off a chain reaction, which caused a crypto-Lehman type moment, resulting in FTX stepping in as the lender of last resort, potentially preventing or delaying an even larger calamity. However, if it were not for this catalyst, something else may have come along and pricked the bubble. Do Kwon had the perfect character traits to succeed in the economic environment in that period. Do was confident, articulate, persuasive, ambitious, greedy, aggressive and narcissistic. There were many others like him who succeeded. When interest rates are set recklessly low and the system is awash with liquidity, money will pour into unstable and maniacal investment ideas. In a way, Do just adapted to the times.
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