Voyager Digital Ltd. marketed its deposit accounts for cryptocurrency purchases as safe, protected by the nation’s banking insurance system in the event of a failure.
This week, when the company tumbled into bankruptcy, customers learned they didn’t exactly have the protection they expected and a banking regulator began an inquiry, according to a person familiar with the matter.
Voyager, a brokerage and lender, was caught in a spiral of plunging crypto prices that is collapsing hedge funds and companies and which blew a hole in its assets. Bitcoin, for example, has lost more than half of its value so far this year.
Voyager froze all activity, including withdrawals on $350 million in customer deposits that are stored at Metropolitan Commercial Bank, a small New York bank. Voyager said customers would be able to access those dollars after “a reconciliation and fraud prevention process is completed.”
The funds are expected to be paid in full to the customers, people familiar with the accounts said. That may not be the case for crypto assets held at Voyager.
Still, some customers online said they were only just learning their deposits weren’t insured by the Federal Deposit Insurance Corp. in the way they thought. Voyager had marketed the accounts as protected by that national safety net, an attractive pitch in the volatile world of cryptocurrency.
“In the rare event your USD funds are compromised due to the company or our banking partner’s failure, you are guaranteed a full reimbursement (up to $250,000),” Voyager wrote in 2019.
Thursday its website said “Your USD is held by our banking partner, Metropolitan Commercial Bank, which is FDIC insured, so the cash you hold with Voyager is protected.”
The individual customer accounts are eligible for insurance, but only in the case of a failure of the bank, not Voyager, Metropolitan Commercial Bank said this week. That is typical since the FDIC only backstops participating banks.
The confusion drew the attention of the FDIC, which is looking into Voyager’s marketing, according to a person familiar with the matter.
A Voyager spokesman declined to comment further.
Voyager has what is known as a For Benefit of Customers account at Metropolitan Commercial Bank.
That is standard for crypto firms and other fintech companies that act like banks in taking customer deposits but don’t have the licenses or ability to actually be a bank. At Voyager, the accounts hold the cash customers use for buying crypto assets or accumulate from selling them.
Metropolitan Commercial Bank held the money in one custodial account. Inside that, customers’ assets were separated into individual accounts by Voyager.
Voyager didn’t have access to the customer funds for its own purposes, according to bankers and analysts. The money is also segregated from Voyager’s assets in bankruptcy and protected from creditors, people familiar with the matter said.
The amount of cash in the customer accounts tripled in the last three months, a sign customers were pulling back on crypto assets.
Metropolitan Commercial Bank is one of a small group of banks willing to work with crypto firms. It held about $1.1 billion in deposits tied to crypto, 19% of its total, according to disclosures. It doesn’t hold any crypto assets and doesn’t make loans backed by crypto.
The bank has said it expects volatility in the deposit accounts due to swings in crypto markets. A hot market will have customers spending cash to buy crypto assets, while a crypto winter tends to see deposits increase.
For that reason, Metropolitan holds the deposits as cash and doesn’t use them for other investments or loans, said Keefe, Bruyette & Woods analyst Christopher O’Connell. The bank had $1.4 billion in cash and cash-like securities at the end of March.
Mr. O’Connell said losing Voyager’s deposit relationship would reduce Metropolitan’s earnings by only about 2% or 3%.
“We expect no additional fallout,” he wrote in a note.