FTC and CFTC Take Action Against Bankrupt Crypto Lender Voyager Digital | Practical Law

FTC and CFTC Take Action Against Bankrupt Crypto Lender Voyager Digital | Practical Law

The FTC filed and settled charges against bankrupt crypto lender Voyager Digital Ltd. and its subsidiaries (Voyager), and also filed a complaint in the US District Court for the Southern District of New York (SDNY) as it awaits approval of the settlement order, charging Voyager and its CEO, Stepen Ehrlich, with violations of the Federal Trade Commission Act and the Gramm-Leach-Bliley Act. The CFTC also filed charges against Ehrlich in the SDNY for violating the Commodity Exchange Act (CEA), including failure to register as a commodity pool operator (CPO) and associated person (AP).

FTC and CFTC Take Action Against Bankrupt Crypto Lender Voyager Digital

Practical Law Legal Update w-041-0852 (Approx. 5 pages)

FTC and CFTC Take Action Against Bankrupt Crypto Lender Voyager Digital

by Practical Law Finance
Published on 25 Oct 2023USA (National/Federal)
The FTC filed and settled charges against bankrupt crypto lender Voyager Digital Ltd. and its subsidiaries (Voyager), and also filed a complaint in the US District Court for the Southern District of New York (SDNY) as it awaits approval of the settlement order, charging Voyager and its CEO, Stepen Ehrlich, with violations of the Federal Trade Commission Act and the Gramm-Leach-Bliley Act. The CFTC also filed charges against Ehrlich in the SDNY for violating the Commodity Exchange Act (CEA), including failure to register as a commodity pool operator (CPO) and associated person (AP).
On October 12, 2023:
  • The FTC issued an order settling charges against bankrupt crypto lender Voyager Digital Ltd. and its subsidiaries (collectively, Voyager), and also filed a complaint in the US District Court for the Southern District of New York (SDNY) as it awaits approval of the settlement order (see FTC Charges).
  • The CFTC filed a complaint in the SDNY charging Ehrlich with violations of the Commodity Exchange Act (CEA) (see CFTC Charges).
According to both the FTC and CFTC filings, Ehrlich and Voyager engaged in a scheme to defraud customers by misrepresenting the safety and financial health of the Voyager digital asset platform. According to the FTC complaint, when the company failed, consumers lost access to saved assets, including ongoing salary deposits, college tuition funds, and downpayments for homes. According to the FTC, consumers were locked out of their cash accounts for more than a month and lost more than $1 billion in digital assets.

CFTC Charges Against Voyager

According to the CFTC complaint:
  • Voyager operated a commodity pool (Voyager pool) and operated as a commodity pool operator (CPO) without the required CFTC registration in violation of CEA Sections 4k(2);
  • Ehrlich did not register as an associated person (AP) of a CPO, despite soliciting members of the public to contribute to the Voyager pool in violation of CEA Section 4m(1);
  • Voyager and Ehrlich defrauded Voyager customers in violation of CEA Section 6(c)(1) and CFTC Regulation 180.1(a)(1) – (3); and
  • Voyager and Ehrlich committed fraud as a CPO and an AP of a CPO in violation of CEA Section 4o(1)(A) – (B).
According to the CFTC complaint, Voyager and Ehrlich pooled customer assets stored on the Voyager platform and conveyed billions of dollars' worth of pooled customer Bitcoin, USD Coin, and other digital asset commodities to high-risk third parties in exchange for returns to fund Voyager's rewards program. According to the complaint, Voyager meets the definition of a CPO because Voyager operated the Voyager pool by pooling assets purchased by Voyager customers, and Voyager did so for the purpose of lending digital assets to third parties to trade, among other things, commodity interests for the benefit of Voyager's customers/pool participants and acted as an unregistered CPO of the Voyager pool by soliciting, accepting, or receiving assets for the purpose of trading commodity interests. Further, Ehrlich operated as an unregistered AP of Voyager by soliciting members of the public to participate in the Voyager pool.
According to the CFTC complaint, in some cases Voyager made unsecured transfers in sufficient volume to bankrupt Voyager in the event of non-repayment, and as part of this practice, undisclosed to its customers, Voyager conveyed pooled customer assets to counterparties at high risk of default.
CFTC Commissioner Caroline D. Pham issued a cautionary statement regarding the CFTC complaint, stating that " the CFTC's interpretation of a commodity pool operator in this enforcement action would seem to include commonplace lending activity – like taking deposits and providing loans. Such an interpretation is an overreach beyond our statutory authority and would disrupt well-established legal and regulatory frameworks for lending to institutions and consumer finance. There is a significant difference between managing investor money for the purpose of trading derivatives, and taking deposits and providing loans to others. Without financing and consumer credit, our economy would grind to a halt."

FTC Charges Against Voyager

The FTC complaint charges Voyager and its CEO, Stephen Ehrlich, with violations of:
  • Section 5(a) of the Federal Trade Commission Act (FTC Act), which prohibits unfair or deceptive acts or practices in or affecting commerce (15 U.S.C. § 45(a)); and
  • Section 521(a)(2) of the Gramm-Leach-Bliley Act (GLB Act), which prohibits any person from obtaining, or attempting to obtain, customer information of a financial institution relating to another person by making a false, fictitious, or fraudulent statement or representation to a customer of a financial institution (15 U.S.C. § 6821(a)).
According to the FTC settlement order, Voyager did not admit or deny the allegations set out in the FTC complaint but agreed to be permanently restrained and enjoined from:
  • Advertising, marketing, promoting, offering, or distributing, or assisting in the advertising, marketing, promoting, offering, or distributing of any product or service that can be used to deposit, exchange, invest, or withdraw assets, whether directly or through an intermediary.
  • Misrepresenting or assisting others in misrepresenting, expressly or by implication the benefits of Voyager's products or services or any other material fact about Voyager's products or services, such as the total costs, any material restrictions, limitations, or conditions, or any material aspect of its performance, efficacy, nature, or central characteristics.
  • Obtaining or attempting to obtain customer information of a financial institution from a consumer by making false, fictitious, or fraudulent representations to any consumer or financial institution, or violating the GLBA.
  • Disclosing to any other person any nonpublic personal information about a consumer unless Voyager has obtained the consumer’s express informed consent to disclose that nonpublic personal information to that person.
The FTC settlement order also requires Voyager to pay a $1.65 billion judgment, which is suspended due to Voyager's pending bankruptcy action. For information on Voyager's pending bankruptcy action, see: