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The Decline and Fall of Vauld. How did a Rising Crypto Star Suddenly Collapse?

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Vauld was flying high till May 2022. Post its funding in July 2021, it had grown its assets under management from $90M to $1B and was projected to reach $5B within the same year. 

It had crossed a million customers and revenues were up by 10 times, with an employee base of 140 which was targeted to more than double to 300 by the end of 2022. 

But then, it all went downhill from there. 

In July 2022, Vauld suspended most of its operations, including customer withdrawals, and now is looking for a suitor to bail them out. 

In this article, we take a closer look at what really went wrong with Vauld.

What is (or was) Vauld?

Vauld is a centralized crypto lending platform founded by Indian entrepreneurs Darshan Bathija and Sanju Sony Kurian in 2018. Originally named as Bank of Holders or BoH, Vauld gave its users a high yield on crypto deposits. It was offering yields of 6.7% for Bitcoin and Ethereum, 12.7% for Terra USD and hundreds of other coins. 

Besides yield, it also acted as an exchange facilitating trading of coins and had about 275 coins listed on its platform. 

Vauld attracted customers with its simplified user experience, compared to the typical cumbersome DeFi lending platforms which are mostly used by power users. It had customers from all over the world but 75% was from India (albeit contributing only 10% of its AUM). 

Vauld raised $2M in its seed round in December 2020 from Pantera Capital, the largest crypto hedge fund in the world as its lead investor. Just seven months later, it raised $25 million in its Series A round led by Valar Ventures founded by silicon valley venture capitalists Peter Thiel, Coinbase Ventures and Pantera Capital. 

There was no looking back for Vauld after the funding. It grew its customer base by 40x and AUM by 10x before the collapse. (AUM = Assets Under Management).

What went wrong?

To understand what went wrong with Vauld, one has to first understand how Vauld was able to give these high yields for the crypto deposits.

The way it worked was, once a customer deposits crypto in Vauld, it goes to a centralized pool.

From this pool, the funds are lent to institutional borrowers and other Vauld customers, and part of the money is given as a float for trading.

All these activities earn interest for Vauld which they pass to their customers after taking their cut. The typical maturity period for these loans Vauld gave out was 3-11 months. 

The trouble for Vauld started after Celsius, another crypto lending platform, announced suspending customer withdrawals in June 13, 2022. Celsius was a bigger player in the centralized lending business than Vauld with $12B in assets under management.

It lost its customers’ funds after a series of missteps investing in DeFi protocols. Rumors were abound in the beginning of June that Celsius is in trouble and has lost customers’ funds, but the company denied them as misinformation. But on 13th June, it suspended the withdrawals confirming the rumors. 

This created a panic in the crypto market, and people who had deposited money in similar lending platforms started withdrawing en masse – similar to a bank run.

Vauld was a casualty in this. It saw massive withdrawals to the tune of $56 million, right after Celsius announced it was pausing its withdrawals.

Vauld continued to witness daily withdrawals of $1-$8 million till July 4. At this point $197M was withdrawn from its account and had just days of runway with liquid assets of $30 million.

Other problems

This was not the only problem Vauld faced. The overall decline in the crypto market led Vauld’s borrowers to default on its loans. Vauld had lent money to borrowers without collateral, and when the crypto price collapsed, those borrowers defaulted and filed for bankruptcy, causing millions of dollars of losses for Vauld. 

Collapse of UST and other crypto currencies also put a hole in its balance sheet. Vauld lost $28 million after UST collapse. It also had long positions in ETH, BTC, Matic and XRP, whose values lost over 30% by the time Vauld announced suspension. 

Vauld also holds crypto as collateral for loans provided in stable coins. This is a very risky strategy that works well in a bull market, but when the market collapses, the value of the collateral also collapses relative to the loan amount. This means that even if Vauld liquidates the collateral, they won’t receive the full amount. 

The loan maturity period of 3-11 months Vauld gave to borrowers also complicated its liquidity position. It’s depositors didn’t have such a waiting period, so they could demand money whenever they wanted, but Vauld had to wait till the loan matures to get the money back from its borrowers. 

In traditional banking, a run is prevented to an extent by FDIC insurance, where deposits are insured to a certain amount. In case of Vauld, even though they had insurance from Bitgo, it only covered losses arising from hacks and thefts, but not from the kind of losses that Vauld experienced.

According to Vauld’s latest affidavit, as of August 1, 2022, Vauld has assets worth of $341.4M and liabilities of $417M, creating a net asset position of negative $75.6M.

With $400M being owed to its creditors, Vauld didn’t have many options other than restructuring their books or getting bailed out by another company. 

The Restructuring efforts

For a potential restructuring, Vauld applied for a 6 month moratorium in Singapore court in July 11

To understand how many creditors support the moratorium, Vauld did a google form survey. They emailed 147k creditors, out of which just 2910 replied, of which 2280 showed support for the moratorium and 188 voted against it while 442 creditors didn’t take any position. 

Vauld owed $125M to its top 20 creditors, of which 12 were in support of a moratorium but 8 were against. 

Vauld argued that a moratorium gave better odds at recovering money than liquidating their assets, since it doesn’t extinguish the claim of creditors.

Though not all creditors were happy with the moratorium. Two individual creditors launched originating claims and two other individual investors filed demand letter against the company. One of the demand letter claimed $340k plus interest.  

On August 1, the Singapore court granted Vauld a three month moratorium ending in November 07, 2022. The court also gave a 4 week deadline to explore mechanisms of withdrawal of funds by the creditors. 

The Offer from Nexo

On July 5, a day after Vauld suspended withdrawals, Nexo, another crypto lending platform offered to buyout the company.

Nexo signed a term sheet that gave it 60 day exclusive exploratory period to do due diligence. The exploratory period will end on  4th September 2022.

If no satisfactory outcome comes from Nexo’s due diligence, Vauld is then free to talk with potential suitors for a bailout.

The other options in front of Vauld is to raise venture capital, recover as much money as possible, wait for the market to turnaround so their assets will appreciate and make up the remaining by issuing Vauld’s own tokens. 

Nexo’s interest in Vauld arise from its huge traction in India and Southeast Asian markets, both markets Nexo want to enter.

Vauld depositors are also hopeful that with Nexo acquisition, there won’t be any hair cut, since it is not in the best interest of Nexo to anger the customers they are acquiring. 

Things getting worse

But to make the matters worse, On 11th August, India’s Enforcement Directorate or ED, a law enforcement agency in charge of investigating economic crimes has frozen its India assets worth 370 crore, of which 164.4 crore in bank and payment gateway balances and 203.26 crore in crypto assets.

ED accused Vauld of illegal lending practices and conducted raids on multiple locations in India.

As per ED, Vauld had lax kyc norms and due diligence with no checks on depositors’ funds which facilitated fraudulent transactions.

Though Vauld denied the charges and said they have fully cooperated with the investigation and still ED froze their account. 

For Vauld’s Indian customers, which is 75% of its userbase it is a double whammy. Vauld conducted its business through two separate subsidiaries.

Defi Payments Pte Ltd is its Singapore entity that caters to the Singapore customers and Flipvolt Technologies Pvt Ltd that does business in India. Therefore the contractual agreement of its Indian users lie with its Indian entity which is not a part of the Singapore court case.

Hence, INR balances are not included in the claim against its Singapore entity Defi Payments and not subjected to the Singapore court proceeding.

Defi payments on the other hand is also a creditor of Flipvolt Technologies, which could also mean Singapore entity can recover funds from Indian entity to give to its Singapore clients. 

Final Take

With $76M required to meet its creditor obligations, Vauld is hoping for a bailout or its asset prices to increase to make its creditors whole. If not, the creditors have to settle for a hair cut or make peace with Vauld’s issued token in the hope that it will appreciate enough to make them whole. 

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