FTX’s $1.4B bid on Voyager Digital assets: A gambit or a way out for users?

In September, cryptocurrency exchange FTX US secured the winning bid for the assets of embattled crypto brokerage firm Voyager Digital with a bid of approximately $1.4 billion. The bid was made up of the fair market value of Voyager’s crypto holdings “at a to-be-determined date in the future.”

According to Voyager, at current market prices, the fair value of its holdings was estimated around $1.3 billion, and the deal included an “additional consideration,” estimated to be worth approximately $111 million.

Since then, new details on the case have emerged, with court filings showing that the cash paid for Voyager Digital itself was only $51 million. The $1.31 billion FTX offered for Voyager crypto holdings are set to be distributed to eligible credits on a pro-rata basis, according to the filings.

The $111 million included in the deal are, as a result, split between the $51 million being paid for Voyager’s assets, intellectual property and user base, and the $60 million that consists of an accumulated $50 account credit for each user who onboards with FEX and a $20 million earnout.

Voyager’s users search for answers

While news of FTX’s winning bid trickles in through court documents and other scarce sources, users of the bankrupt firm keep on searching for answers, organizing through social media to accumulate as much information as possible.

Initial math done by users taking Voyager’s balance sheet into account has suggested that users who move on to FTX can expect to get a haircut of over 30% on the assets they held. To some, seeing any type of return is better than seeing nothing after the platform went under.

FTX’s CEO Sam Bankman-Fried has said that its bids were “generally determined by fair market price,” with the company buying up assets to give them back to customers.

to be clear -- in Voyager, our bids are generally determined by fair market price, no discounts; goal isn't to make money buying assets at cents on the dollar, it's to pay $1 on the $1 and get the $1 back to customers.If we were to get involved in Celsius, it would be the same.

— SBF (@SBF_FTX) October 2, 2022

Voyager’s problems emerged after the firm extended a loan of $670 million to crypto hedge fund Three Arrows Capital, which defaulted in late June. FTX’s bid excluded the Three Arrows Capital loan.

As it stands, it seems users who will receive their assets back will have to flock to FTX’s trading platforms if the court approves the deal. The Voyager app would, as a result, reach its end while FTX’s user base would swell significantly.

Recent: Is payments giant SWIFT preparing for a blockchain-bound future?

To users who may soon be moving to FTX, there are a few concerns that they need to be aware of if they choose to stay on the new platform.

FTX offers its users an earn program that allows them to earn interest on their cryptocurrency holdings, albeit with annual percentage yields (APYs) that are usually lower than those users were getting on other crypto lending platforms, including Voyager.

FDIC insurance snafu

Before Voyager Digital went under, regulators directed it to remove “false and misleading statements” that its users’ deposits were insured by the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) as if they were regular savings accounts.

In a joint letter, Seth Rosebrock and Jason Gonzalez, assistant general counsel at the FDIC, suggested that Voyager’s representations “likely misled and were relied upon” by customers placing funds on the platform.

While FTX has been seen as a beacon of hope attempting to backstop contagion in the cryptocurrency industry after a run for liquidity led to the collapse of several firms, the FDIC also warned it to stop making “misleading” statements regarding the insurance status of users’ deposits.

FTX received a cease-and-desist letter from the FDIC to stop suggesting user funds on the platform were insured. The letter specified that Brett Harrison, the president of FTX US, said in a tweet that direct deposits from employers were stored in FDIC-insured accounts in users’ names.

While Harrison responded on social media by saying that he deleted the post and didn’t mean to indicate that cryptocurrencies stored in FTX are insured by the FDIC, his statements could have misled users flocking for safety.

Contagion risks

As users move to FTX either because they enjoy the platform, want to diversify from Binance or Coinbase or want the ability to earn interest on their tokens, the company grows.

It’s unclear whether FTX’s attempts to backstop contagion in the cryptocurrency space could be leaving the exchange itself vulnerable, although experts believe what it’s doing is risky.

Speaking to Cointelegraph, Richard Gardner, CEO at fintech firm Modulus, said it’s important to recognize the “FTX gambits” for what they are, as attempts to “buy up risky assets at rock bottom prices to expand a la Andrew Carnegie.”

Gardner added that Bankman-Fried is “attempting to consolidate the industry” by betting on high-risk endeavors. He concluded:

“This recession is in its earliest stages, and the smarter play is to let the Fed's monetary policy shifts play out and save capital. In the relatively near future, there will be companies, complete with better fundamentals and greater viability, in need of a bailout. Those companies will be the better investment. FTX is simply playing roulette at this point.”

Investors who may potentially be moved to FTX may also want to consider that the company is involved in American politics as its digital markets co-CEO Ryan Salame has campaigned with his girlfriend Michelle Bond, a New York Republican running for Congress.

Salame has reportedly spent millions on political donations in the 2022 election cycle by donating to cryptocurrency-focused super political action committees (PACs). Super PACs can raise unlimited amounts of money to support candidates but cannot donate to them directly.

Some of the funds Salame deployed, according to finance reports, appear to have been funneled into Bond’s race after a series of money transfers. Bond herself holds cryptocurrencies.

Alameda Research and FTX

Alameda Research is a crypto quantitative trading firm and market maker founded by FTX’s CEO Sam Bankman-Fried. The firm often seems to fly under the radar, but its trading volume and incredible profit of $1 billion in 2021 have made the task harder as time goes by.

Alameda Research’s influence has been seen by some as a potential conflict of interest, taking into account its relationship with FTX. Cory Klippsten, CEO of crypto startup Swan Bitcoin, has been quoted saying that FTX and Alameda have been “able to benefit from a regulatory gap that has allowed them to trade and profit from cryptocurrencies” without following the same rules traditional financial institutions do.

For its part, Sam Bankman-Fried has said Alameda is a “wholly separate entity” that gets no preferential treatment. As Bloomberg reported in September 2022, questions persist because Bankman-Fried and Alameda’s CEO Caroline Ellison have until recently shared an apartment with eight other colleagues.

Recent: Man and machine: Nansen’s analytics slowly labeling worldwide wallets

Ellison has addressed these concerns, saying they’re “arm’s length and don’t get any different treatment from other market makers.” Alameda was initially FTX’s largest trader, as in its early days, the exchange had limited access to liquidity. According to Bankman-Fried, it’s no longer the platform’s biggest market maker.

While the potential conflict of interest could mean regulators will soon target FTX once again, the company is reportedly actively in talks with the United States Securities and Exchange Commission (SEC), which reduces regulatory risk.

As users flock to FTX — or any other centralized entity — it’s important to always consider the pros and cons of keeping funds on that platform. As Bitcoin (BTC) advocate Andreas Antonopoulos famously said: not your keys, not your coins.