Amidst Regulatory Turbulence CFTC Weighs Action Against Former Voyager Digital CEO

By  Noah Washington October 10, 2023

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  • The CFTC is considering enforcement action against former Voyager Digital CEO Stephen Ehrlich for alleged violations of US derivatives regulations
  • Allegations are that Ehrlich and Voyager provided misleading information to customers about safety of assets
  • Ehrlich asserts he will be vindicated in court; case highlights increased regulatory scrutiny of crypto industry

Recent developments have brought to light a significant legal quandary involving Stephen Ehrlich, the former CEO of Voyager Digital, and the United States Commodity Futures Trading Commission (CFTC).

The CFTC is reportedly considering taking enforcement action against Ehrlich, the former CEO of Voyager Digital, a cryptocurrency lending firm. This potential action stems from alleged violations of U.S. derivatives regulations by Ehrlich, a development that could have far-reaching consequences in the cryptocurrency space.

Voyager Digital's Bankruptcy Filing in July 2022

The backdrop of this unfolding drama is Voyager Digital's bankruptcy filing in July 2022. The company, once a prominent player in the cryptocurrency lending sector, filed for Chapter 11 protection amidst the collapse of Three Arrows Capital.

Three Arrows Capital (3AC) largely contributed to the downfall of Voyager Digital. 3AC had taken out large loans from Voyager, with its positions and Voyager shares put up as collateral. When 3AC failed to meet margin calls and defaulted on its loans due to losses when Terra (LUNA) plummeted in value from over $100 to near zero in May 2022.

Price of Terra (LUNA) since May 2022. Source: CoinGecko

Voyager had significant exposure to 3AC, with over $650 million in loans owed. The default by 3AC on its Voyager loans was a major factor that led Voyager to halt withdrawals in early July 2022 as it faced its own liquidity crisis.

Ehrlich's Response to Allegations

In response to the allegations that the CTFC may file a civil suit, Stephen Ehrlich expressed both frustration and confusion. He was quoted as saying, "These allegations appear to be one of those times where the referees are making new rules and calling foul after the game has ended."

Ehrlich's response highlights the complicated legal issues at play and signals that resolving the CFTC inquiry into Voyager could be a lengthy process. The CFTC's involvement in this case revolves around a thorough investigation by its staff. This inquiry sought to determine whether Ehrlich and Voyager Digital had violated U.S. derivatives regulations in their operations.

The heart of the matter lies in the alleged violation of U.S. derivatives regulations by Stephen Ehrlich. The specifics of these violations have not been publicly disclosed, but they form the basis of the potential enforcement action against him.

Allegations of Misleading Information to Customers

In addition to the derivatives violations, allegations have emerged suggesting that Ehrlich and Voyager Digital provided misleading information to customers regarding the safety of their assets. Such allegations raise serious concerns about consumer protection and adherence to industry standards.

As a result of the investigation, the CFTC's enforcement division has made an internal recommendation to formally accuse Ehrlich of violating derivatives regulations. This development marks a significant step in the legal proceedings and adds to the mounting pressure on Ehrlich. Following the internal recommendation, CFTC Commissioners are now deliberating on whether to take enforcement action against Stephen Ehrlich. This decision carries significant implications not only for Ehrlich but also for the broader cryptocurrency industry.

If the CFTC decides to proceed with enforcement action, Stephen Ehrlich could face a range of potential consequences, including fines, penalties and legal restrictions on his future involvement in the cryptocurrency sector. The outcome of these deliberations will be closely watched by industry stakeholders and regulatory bodies alike.

Ehrlich's Cooperation with Authorities

Ehrlich has asserted that Voyager Digital cooperated with relevant authorities before its bankruptcy. This claim highlights the complexity of the case and suggests that Ehrlich and his team were not operating in isolation but within the regulatory framework.

Expressing his perspective on the anticipated lawsuit, Ehrlich stated, "I look forward to being vindicated in court". Ehrlich's confidence in his vindication in court sets the stage for a legal battle that could provide valuable insights into the evolving relationship between cryptocurrency firms and regulatory bodies.

In a related development, Paul Hage, Voyager's bankruptcy administrator, endorsed a settlement deal with the Federal Trade Commission (FTC). This agreement aims to address the FTC's allegations that Voyager had provided inaccurate information to its previous customers regarding the availability of Federal Deposit Insurance Corp. (FDIC) protection.

Addressing Allegations of Inaccurate Information

The endorsement of the settlement deal showcases the broader challenges facing cryptocurrency companies in terms of regulatory compliance and consumer protection. It also emphasizes the need for greater transparency and accountability in the industry.

At its peak, Voyager Digital was one of the largest lenders in the cryptocurrency industry and even had endorsements by Mark Cuban. As the CFTC's deliberations continue and legal proceedings unfold, this case will remain a focal point of attention in the cryptocurrency industry. The outcome could set important precedents for future regulatory actions in the sector.

The potential enforcement action against Ehrlich serves as a reminder of the increasing scrutiny that cryptocurrency businesses face from regulatory bodies. The industry's growth and evolution are closely intertwined with its ability to navigate and comply with evolving regulations.