The Commodity Futures Trading Commission (CFTC) has taken legal action against Stephen Ehrlich, the co-founder and former CEO of Voyager Digital Ltd., alleging that he violated derivatives rules during his tenure, which ultimately led to the cryptocurrency lender's bankruptcy and a staggering $1.7 billion in customer losses. The CFTC's lawsuit, filed in a US federal court in New York, contends that Ehrlich and Voyager "fraudulently solicited participation in and operated a digital asset trading and custody platform," luring customers with promises of returns as high as 12% on specific crypto holdings while making misleading statements about the platform's safety.
According to the CFTC, Voyager facilitated billions of dollars' worth of transactions involving digital assets classified as commodities, including Bitcoin and Circle's USD Coin, through these enticing tactics. Voyager's downfall in 2022's crypto turmoil marked one of several significant events in the industry's tumultuous year, culminating in the collapse of crypto trading giant FTX, where the co-founder, Sam Bankman-Fried, is currently facing a criminal trial in New York.
Furthermore, the Federal Trade Commission (FTC) has also sued Ehrlich separately, alleging that he made false claims regarding the availability of Federal Deposit Insurance Corp. (FDIC) protection for Voyager's former customers. The FTC accused Ehrlich of assuring customers that their deposits were secure even as the company neared bankruptcy.
In response to these allegations, Ehrlich expressed his outrage and dismay, asserting that he was being used as a "scapegoat for the bad actions of others." He maintained that he eagerly anticipated vindication in court and highlighted that he and his team at Voyager consistently cooperated with regulators. He also expressed deep concern for the losses suffered by Voyager's customers and creditors due to the conduct of other actors in the crypto industry.
Voyager reached a settlement with the CFTC, accepting a permanent ban from handling consumers' assets without admitting or denying the allegations. Representatives for Voyager did not provide a comment on the situation.
The CFTC's accusations against Ehrlich and Voyager revolve around the alleged dissemination of false statements to encourage customers to store their assets without withdrawing them. Behind the scenes, the agency claims that Voyager, under Ehrlich's direction, took excessive risks with customer assets, leading to its eventual downfall.
Voyager filed for bankruptcy in July 2022, citing crypto market volatility and the default of a loan exceeding $650 million from Three Arrows Capital, a hedge fund. The CFTC asserts that Voyager transferred over $650 million worth of customer assets to a digital-assets hedge fund, referred to as "Firm A," despite warnings about the high risks and a lack of financial disclosure from the hedge fund. Firm A allegedly refused to provide any financial statements, instead sending a one-sentence letter claiming to list its net asset value, without supporting documentation.
The legal actions against Ehrlich and Voyager highlight the challenges and complexities of regulatory oversight in the rapidly evolving cryptocurrency industry, underlining the importance of compliance and transparency in this burgeoning sector.