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Vauld Restructuring Announcements and FAQs
FAQs on Vauld Group Restructuring As of 31-July-22
FAQs on Vauld Group Restructuring As of 31-July-22
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Written by Vauld
Updated over a week ago

Table of Contents:

1. Vauld Group financial position

2. The moratorium and Restructuring Proposal

3. Clarification on INR fiat balances

4. Vauld License and Other Queries

5. Next steps – Investor process


What did Vauld announce?

On 4th July 2022, we announced that due to financial challenges faced in recent months, it has become necessary to restructure the Vauld business.

On 8th July 2022, Defi Payments Pte Ltd filed an application in Singapore to enter into a court-supervised process to restructure its liabilities, known as a scheme of arrangement. As part of the restructuring procedure, Defi Payments Pte Ltd applied for court protection from legal proceedings being commenced against it under a procedure known as a moratorium.

By virtue of filing such an application, an automatic 30 day moratorium is now in place and prohibits the commencement and continuation of any legal proceedings against the Company during the period the moratorium is in place, pending the hearing of the company’s application for a 6 month moratorium. The moratorium is an important procedure to provide the company with the breathing room necessary for it to formulate and consider its options carefully.

To best manage our situation and to ensure that our decisions protect our customers’ best interests, we have engaged the services of Kroll Pte Limited as our financial advisor, as well as Cyril Amarchand Mangaldas and Rajah & Tann Singapore LLP as our legal advisors in India and Singapore respectively.

1. Vauld Group financial position

1.1 Which recent market events have had the greatest impact on Vauld’s financial position?

The recent market events that have had the greatest impact on Vauld’s financial position can be attributed to a combination of circumstances including volatile market conditions, the financial difficulties of our key business partners inevitably affecting us, and a liquidity crisis caused by a significant amount of customer withdrawals from 12 June 2022 following the announcement by Celsius that is was pausing customer withdrawals.

First, the collapse of TerraUSD (“UST”) affected Defi Payments both directly and indirectly. One of Defi Payments’ methods for generating cash is by converting fiat-backed stablecoins into higher-yield stablecoins. As Defi Payments had staked a significant amount in UST of an estimated ~US$28m, the collapse of the price of UST caused Defi Payments’ net asset position to decrease sharply.

Likewise, the collapse of the price of UST had also affected Defi Payments’ conduct of mark-to-market trading of UST. Due to the collapse of the cryptocurrency market, there were also losses attributable to the mark-to-market trading done by Defi Payments because it had taken long positions in cryptocurrencies such as Bitcoin, Ethereum, Matic and XRP, that are currently valued at ≈US$37m.

Second, due to the collapse of the price of certain cryptocurrencies, a number of debtors which had borrowed cryptocurrencies on the Vauld Platform without providing collateral collapsed and defaulted on their loans. The unexpected bankruptcy of its borrowers has led to Defi Payments having outstanding debts of about 85 BTC (≈US$1.7m) owed to it with little to no hope of recovery.

Vauld experienced significant pressure on liquidity from 12 June 2022, when Celsius announced that it would pause all withdrawals. There were net withdrawals by Vauld customers of ≈US$56m on the day following the announcement. Daily net withdrawals by Vauld customers in the range of ≈US$1–8m persisted from that time up until the suspension of customer accounts on 4 July 2022. The value of the liquid assets of Vauld was less than ≈US$30m at that time.

1.2 What are the underlying reasons for the liquidity pressure?

Defi Payments’ assets are mostly illiquid as they are not either immediately realisable or realisable in the short-term. These include receivables owing to Defi Payments in respect of loans provided by Defi Payments to retail customers on the Vauld Platform and loans to institutional partners.

Further, the recent collapse of the TerraUSD stablecoin resulted in a chain effect on other cryptocurrency platforms, which led to a significant increase in the number of withdrawal requests on the Vauld Platform. Therefore, the concurrent rapid withdrawal requests as well as the sharp reduction in deposits on the Vauld Platform greatly exacerbated the pressure exerted on Defi Payments’ liquidity. In June 2022, net customer withdrawals were on average in the range of ≈US$1-8m per day, with a peak single-day net withdrawals of ≈US$56.0m on 13 June 2022. This rate of withdrawals against the liquid assets available to the Company of ≈US$28.5m as of 28 June 2022 placed great strain on Defi Payments’ liquidity.

1.3 Have customers withdrawn cryptocurrency from the Vauld wallets to their private wallets?

It is possible to observe through the blockchain data that some customers did transfer funds from Vauld to their private wallets but this was strictly only before the date of the suspension of the Vauld customer accounts on 4 July 2022. From the time of the Celsius announcement of pausing withdrawals, we saw a net outflow of funds from Vauld wallets to various destinations such as exchanges, private wallets and lending companies.

1.4 Has Vauld loaned cryptocurrency out for profit? What is the risk of loan default?

As soon as a User deposits cryptocurrency to their account with Vauld, it goes into a centralized pool. The cryptocurrency from the centralised pool are allocated for lending and trading. Cryptocurrency is lent from the pool to institutional borrowers and Vauld customers where the current maturity profile of the loans currently ranges from three to eleven months. There is inherently a certain level of counterparty risk which in the current market environment may be considered to be higher than usual.

1.5 How did the mark-to-market on long crypto positions in BTC, ETH, MATIC and XRP result in losses?

There were losses attributable to the mark-to-market trading done by Defi Payments because it had taken long positions in cryptocurrencies such as Bitcoin, Ethereum, Matic and XRP, that are currently valued at ~US$37m.

By way of illustration, the price of BTC on 9 May 2022, the date on which TerraUSD was de-pegged, was US$30,297 whereas by 4 July 2022, when Vauld suspended customer accounts, the price of BTC was US$20,231, representing a 33% devaluation of BTC relative to USD over the approximately two-month period.

The Company also holds cryptocurrencies as collateral against loans to Vauld customers provided in stablecoin where the value of the collateral has been eroded relative to the outstanding loan amounts.

1.6 How did the collapse of Terra USD impact Vauld?

First, the collapse of TerraUSD (“UST”) affected Defi Payments both directly and indirectly. One of Defi Payments’ methods for generating cash is by converting fiat-backed stablecoins into higher-yield stablecoins. As Defi Payments had staked a significant amount in UST of an estimated ~US$28m, the collapse of the price of UST caused Defi Payments’ net asset position to decrease sharply.

Likewise, the collapse of the price of UST had also affected Defi Payments’ conduct of mark-to-market trading of UST. Due to the collapse of the cryptocurrency market, there were also losses attributable to the mark-to-market trading done by Defi Payments because it had taken long positions in cryptocurrencies such as Bitcoin, Ethereum, Matic and XRP, that are currently valued at ≈US$37m.

1.7 What is being done to protect the remaining assets of Vauld? Are any of Vauld’s assets pledged as collateral for loans?

Vauld is in process of collecting its assets in an orderly way where the assets of Defi Payments have either been pooled or are subject to a trust arrangement. This includes loans receivable that currently have a maturity profile around three to eleven months.

1.8 How does Vauld plan to close the net liability gap? Will the position worsen?

Vauld will explore all available options in the restructuring process to close the net liability gap including investor processes, capital raising, debt conversion and/or a repayment plan linked to future performance and/or maturity profiles of the assets.

The future expected net asset/liability position is unknown and will be dependent on future market performance and as yet unquantifiable events that may arise from risks, both known and unknown.

1.9 Will an increase in crypto asset values or prices help Vauld’s financial position?

An improvement in the cryptocurrency market is likely to result in a greater and more attractive range of options available to the Company as part of the restructuring process.

1.10 Why did Vauld’s Corporate statement dated 4 July 2022 (the “Corporate Statement”) cite the decline of Three Arrows Capital (“3AC”) as one of the reasons for Vauld’s current situation when Vauld did not have exposure to 3AC?

While the Company did lend out some capital to 3AC, all positions were closed around September 2021. 3AC was also an early seed investor however exited around December 2021.

The statement in the Corporate Statement regarding “Three Arrows Capital defaulting on their loans” was intended to be illustrative of the current market environment rather than any specific exposure of the Vauld Group to 3AC.

1.11 Why did the 1st Affidavit of Darshan Sunil Bathija dated 8 July 2022 (the “1 st Affidavit”) exhibit a website blog post dated 22 June 2022 setting out “Vauld’s 6-month plan to ship great products”.

The Vauld Group continues to innovate and introduce new products. Despite the recent economic and market conditions, the Vauld Group had in the pipeline a 6-month plan to roll out new products and services, including derivatives and margin trading, expanding its over-the-counter trading services, and improving its existing blockchain network systems.

This was presented in the 1 st Affidavit as one of the reasons why the Vauld Group would appear attractive to a potential investor for the purposes of a scheme of arrangement. The cryptocurrency business operated by the Vauld Group is a viable business which has suffered temporarily due to the prevailing market conditions, but still does its best to plan and develop new products and services moving forward.


2. The moratorium and Restructuring Proposal

2.1 Who are the creditors of Defi Payments?

The creditors of Defi Payments are:

  1. Vauld Users with cryptocurrency balances in their accounts with Vauld;

  2. Institutional lenders that have lent funds to Defi Payments; and

  3. Vendors in the ordinary course of business.

2.2 What is a moratorium and why does the Company need one?

A moratorium means that the company is granted a stay on proceedings. In simpler terms, within the moratorium period, no parties can bring legal action against the company. The moratorium does not extinguish the claims of creditors, but merely puts a pause on the enforcement of those claims.

A moratorium therefore provides us with breathing space to be able to formulate restructuring proposals and plans, negotiate with stakeholders, and gain potential financial support for the company without the looming threat of having to defend legal proceedings.

2.3 What does a moratorium mean for creditors?

A moratorium will provide an opportunity for Defi Payments to formulate a comprehensive restructuring plan for its creditors and explore options to:

(i) revive the business; and

(ii) provide a better outcome for its creditors with the benefit of time to formulate a restructuring proposal.

Without a moratorium, it is highly likely that creditors would receive a lower rate of recovery, for example in a liquidation scenario, as compared to a scheme of arrangement.

2.4 How long will the moratorium last?

Defi Payments has applied for a 6-month moratorium. It is likely that Vauld will make use of the full 6 months and seek for an extension if necessary. The total length of time of the moratorium will be highly dependent on: (i) investor processes and terms that may be able to be agreed with Nexo and/or others; (ii) the range of recovery options available and which are acceptable to the creditors; and (iii) the market conditions, amongst others.

It is important to note that the interests of the management of Defi Payments / Vauld are aligned with creditors not to prolong the restructuring process and to reach agreement on a compromise arrangement as soon as practicable.

2.5 Does the moratorium apply outside of Singapore?

The moratorium will serve to protect Defi Payments against any legal actions in Singapore until it is lifted.

2.6 What happens if an extension of the automatic 30-day moratorium is not granted?

Without a moratorium, Defi Payments will be exposed to legal actions that would present a risk of the Company being forced into compulsory winding-up or liquidation by one of its creditors.

A liquidation scenario would likely translate to a lower level of recovery for Defi Payments’ creditors as compared to a comprehensive restructuring plan developed over time with the support of the Company’s financial advisors. A further effect would be to disrupt the ongoing due diligence process being conducted by Nexo.

2.7 How would creditors withdraw their cryptocurrency under a successful restructuring? Would this be in crypto or fiat currency?

The restructuring process is at too early a stage for this to be known and is subject to:

(i) full exploration and assessment of the available options; and

(ii) ongoing market conditions, before settling on a repayment plan.

Whether to propose repayments to creditors in fiat or crypto and how or when to lift the suspension of customer account activities are unknown factors at this time.

2.8 Will Vauld prioritize a few creditors over the others?

All creditors will be treated fairly under the restructuring proposal which will be set out in a detailed Scheme of Arrangement to be put before the creditors for voting.

The Scheme of Arrangement, if passed by a vote of creditors, will be reviewed and sanctioned by the Court which will also take into account whether the arrangement is fair and equitable to all creditors.

2.9 If we support the moratorium now, do we lose the ability to make any claims at any point or during the moratorium period?

The Company will be protected from creditor claims for the duration of the moratorium. An indication of support for the moratorium by anyone and all creditor/s will be taken into consideration by the Singapore courts in deciding whether to grant the moratorium.

There will not be any impingement of the legal rights of any one creditor who has indicated support for the moratorium to make a legal claim against the Company outside of the moratorium. A moratorium simply puts a pause on a creditor seeking to commence legal proceedings against the company. It does not have an impact on any claim itself.

2.10 When will Vauld complete its restructuring process?

Defi Payments has filed for a 6-month moratorium. It is likely that the Company will make use of the full 6-month period in formulating a restructuring proposal and will seek an extension if necessary.

The length of time of the moratorium will be highly dependent on: (i) the investor process; (ii) how market conditions play out; and (iii) what other opportunities may present and be of benefit to engage with.

2.11 Why has Vauld filed an application in the Singapore court for Defi Payments and not Defi Holdings Pte Ltd?

Vauld customers holding cryptocurrency balances in their accounts with Vauld have a contractual agreement with Defi Payments per the standard Terms and Conditions entered into by each Vauld User on signing up.

There is no such contractual agreement between Defi Holdings Limited and Vauld Users. Any claims by Vauld Users would be brought against Defi Payments and not Defi Holdings, therefore Defi Payments has applied to the Singapore courts for a moratorium.

2.12 The 1st Affidavit of Darshan Sunil Bathija dated 8 July 2022 (the “1 st Affidavit”) describes a range of potential solutions available in the restructuring including at paragraph 36(b)(i), “full repayment to a minority of creditors in a relatively short period of time”. How does this reconcile with all creditors being treated fairly?

There are various options to form the basis of a possible repayment plan under a restructuring proposal including caps on withdrawals, % withdrawals and providing options for near-term or longer-term realizations.

In an example where there may be a daily cap set on withdrawals, a minority of creditors, which are those with the smallest balance in their accounts with Vauld, would be in a position to withdraw the full balance outstanding in the User account within a shorter period that others with higher balances.

This is provided in the 1 st Affidavit as an example of one potential option for a repayment plan under a restructuring proposal however is one of many possible options that will be explored in formulating the restructuring plan.

2.13 Will creditors of Defi Payments be required to submit a claim to be taken into account for the purpose of voting on the Scheme of Arrangement and what would be the likely timing of this?

Creditors of Defi Payments will be required to submit a claim via a Proof of Debt form to be included in the voting for the Scheme of Arrangement at a Creditors’ meeting.

No action is required at this stage and the Company will provide Creditors with notice at the appropriate time with clear instructions on how to submit claims.

2.14 If the restructuring proceedings are happening in Singapore, how would

overseas customers of Vauld be impacted, if at all?

Defi Payments Pte Limited, which is a Singapore incorporated entity, is the

counterparty to the contractual arrangements of all Vauld Users in relation to

the cryptocurrency balances held in their accounts with Vauld regardless of the

place of residence of the customer. All customer account balances that are

denominated in cryptocurrency will be subject to the Singapore court

proceedings related to Defi Payments.

2.15 Will the restructuring be approved by creditors?

The restructuring proposal will be presented to creditors in the form of a

detailed Explanatory Statement including an estimate of recoveries that will be

made available to Creditors. Defi Payments will apply to the Singapore court to

convene a Creditors’ meeting to consider the terms as set out in the Explanatory

Statement and hold a vote on whether to approve the restructuring via a

Scheme of Arrangement.

The Scheme of Arrangement will pass the vote on the basis of: (i) 50% in

number of the creditors present and voting at the Creditors’ meeting; and (ii)

75% or more in value.

No action is required at this stage and the Company will provide Creditors with

notice at the appropriate time with clear instructions on how to attend and vote

at the Creditors’ meeting.

2.16 What is the indicative level of support for Moratorium?

As of 26 July 2022, out of a total of 147,000 creditors of Defi Payments that we

sent email notices to, 2,910 had responded to indicate their position in relation

to the Moratorium. Of these, 2,280 or approximately 78.3% indicated that they

supported the Moratorium Application. Of the remaining responses, 15.2%

indicated that they have no position and only 6.5% indicated an objection to the

Application.

______________________________________________________________

3. Clarification on INR fiat balances

3.1 How will INR balances be treated in the Restructuring?

Vauld customers with INR balances in their accounts with Vauld have a

contractual agreement with Flipvolt Technologies Pvt. Limited (“Flipvolt”) per the

standard Terms and Conditions entered into by each Vauld User on signing up.

Any claims by Vauld Users in relation to INR balances outstanding in their

accounts with Vauld would be against Flipvolt and not Defi Payments, therefore

INR balances are not included as claims against Defi Payments and are not

subject to the Singapore court processes.

3.2 What are the steps being taken for users with INR balance?

Time is needed for exploration of possible options available under the

restructuring including to work through the investor process.

A suitable process to deal with the debts which customers have in respect of

their INR balance outstanding in their accounts is being planned in India and

material updates will be provided as and when they become available.

3.3 If crypto liquidity is an issue, why have the INR withdrawals been disabled?

The INR balances represent liabilities of Flipvolt but are not the only liabilities of

Flipvolt. Defi Payments is also a net creditor of Flipvolt due to the pattern of the

flow of funds between these operating entities.

If Vauld Users are allowed to withdraw the INR balances outstanding in their

accounts with Vauld, these payments would be made in preference to other

creditors of Flipvolt and result in unfair treatment of one group of creditors

ahead of others.

3.4 Do the liabilities set out in the affidavit include INR fiat balances?

INR balances are liabilities of Flipvolt. Therefore, the 1st Affidavit of Darshan Sunil Bathija dated 8 July 2022 (the “1st Affidavit”) does not include the INR balances outstanding in Vauld Users’ accounts with Vauld as liabilities of Defi Payments.

______________________________________________________________

4. Vauld License and Other Queries

4.1 Please provide clarifications regarding a comment made in a recent media

conference held by the Monetary Authority of Singapore, which was as

follows: “Vauld is currently not licensed by MAS nor has it sought any

exemption from holding a licence under the Payment Services Act. It has

submitted a license application, which is pending review”.

Vauld is not licensed to operate a fiat to crypto exchange business in Singapore

and neither does it have an exemption to the requirements of the Payment

Services Act. We've always communicated this to our community.

It's also important to know about the Payment Services Act in Singapore. It

classifies regulated and unregulated activities. So, crypto custody, crypto yield,

crypto borrowing and lending - none of these activities are classified as regulated

service offerings under the Payment Services Act in Singapore.

4.2 What rights does Vauld (Defi Payments) have to operate as a crypto exchange

in Singapore?

Our fiat to crypto exchange services are not offered in Singapore. They are made

available to customers by Flipvolt Technologies Pvt. Limited, which is an India

incorporated entity.

4.3 Why is Vauld not able to operate as usual and how did the situation change so

rapidly?

The situation changed rapidly after Celsius announced that it would pause all

withdrawals. We experienced persistent net withdrawals from that time to a

point where the value of liquid assets was less than ≈US$30m which in terms of

liquidity runway was only days remaining when the decision was made to

suspend customer withdrawals, deposits and trading activity on 4 July 2022.

4.4 Is Vauld’s Bitgo insurance available to help in the current situation?

Bitgo’s insurance coverage is very specifically in relation to third-party hacks,

copying, loss or theft of private keys, insider theft, or dishonest acts by our

employees or executives. For instance, due to theft of cryptocurrencies. In such

cases, we are eligible to claim the applicable cover value. Therefore, the Bitgo

insurance does not cover the current situation.

4.5 Will interest continue to accrue on deposits?

Interest will continue to accrue on deposits as per the terms of the underlying

contractual agreements.

4.6 How is it possible that transactional activity has been observed in relation to

Vauld Wallets when customer account activity has been suspended?

These transactions have not been initiated by Vauld Users. We manage liquidity

across various venues and finance institutions that act as liquidity partners. We

are managing outstanding positions and borrowed cryptocurrency from other

platforms as well. The withdrawals and deposits that have been observed are

purely internal and related to our hot wallets and not related to customer

account activity of any kind.

______________________________________________________________

5. Next steps – Investor process

5.1 What is the update on the Nexo deal and when will the sale happen?

We have been through multiple rounds of discussions with Nexo Inc. (“Nexo”) as

an interested investor. The respective leadership teams of Vauld and Nexo are

currently engaged in close correspondence.

5.2 What is the purpose in allowing 60 days for due diligence in respect of the

potential sale to Nexo?

We have entered into a 60-day exclusivity period with Nexo for the purpose of

conducting an intensive due diligence exercise which is not uncommon

particularly given the size of the potential transaction and the volume of

business related, financial and legal information and documentation that any

investor would need to analyze in order to make a thorough assessment of the

business and to consider questions of valuation and synergies.

5.3 When will the 60-day exclusivity period with Nexo end?

The 60-day exclusivity period granted to Nexo will end on 4 September 2022.

5.4 What is the likely outcome of discussions with Nexo and what will this mean

for creditors?

The discussions are currently ongoing and we are at too early a stage for this to

be made known however it is subject to: (i) completion of the ongoing due

diligence exercise; and (ii) further discussions and negotiations.

We will provide material updates to the creditors as and when it is appropriate

5.5 Will Vauld engage in discussions with any other potentially interested parties?

Vauld will be free to engage with other potential investors following expiry of the

60-day exclusivity period with Nexo.

For more queries, please write to us at enquiries@vauld.com

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