Digital Surge

A decision to store half its assets in FTX just weeks before the global exchange declared bankruptcy in the US forced the same outcome on Digital Surge.

The Brisbane based digital currency exchange had ~$65 million of assets under management and offered ~300 different cryptocurrencies to its 60,000 customers. By leveraging different global cryptocurrency exchanges to deliver the lowest prices for its customers, Digital Surge had generated significant growth, but in December 2022, it found itself in the position that if more than 52% percent of its customers elected to cash out their investment, the exchange would be unable to pay them.

Industry uncertainty was in overdrive. The Director’s turnaround plan started with customer trade continuing, but with asset withdrawals suspended. Just before the directors appointed Voluntary Administrators on 8 December 2022, all trading activity on the exchange ceased.

On appointment as Administrators, KordaMentha’s first priority was to secure and insure the remaining funds, a first in the Australian restructuring market. Knowing that cryptocurrency was uninsurable through traditional means, KordaMentha established a relationship with institutional grade digital asset custodian, Zerocap, which enabled Digital Surge’s remaining $30 million of cryptocurrency to be immediately transferred to a secure and fully insured facility whist a turnaround strategy was developed.  

Communication with the customers was critical in providing the company with any possibility of a successful turnaround. We established a dedicated telephone line and email for customers so we could understand what customers valued most. This turned out to be the ability to receive cryptocurrency, rather than having it sold and distributed in cash.

With legal advice from Piper Alderman, we were able to confirm ownership of the cryptocurrency assets, enabling them to form part of the restructure proposal. We also investigated the ability to provide 30,000 creditors with a proportionate distribution in cryptocurrency. Working closely with the directors and the company’s software engineers, we agreed a safe and secure process using existing company IT infrastructure and blockchain technology to distribute to creditors digital assets with highly volatile values in-specie (non-cash) and pari-passu (shared equally), another first in the Australian restructuring industry.

The turnaround plan was implemented using a voluntary administration, deed of company arrangement, and creditors’ trust.

The result was all employees were retained, the exchange re-opened and continued to trade, ~7,000 creditors with a claim below $250 were paid in full, and all other customer and unsecured creditors received 57c/$ upfront return with the 43c/$ balance to be paid in cash from company profits over the next five years and the successful recovery of the claim against FTX.

Two aspects to our approach were key to this success. Firstly, the open communication between the Administrators and directors, as well as Administrators and customers. Secondly, the entrepreneurism in facilitating a cryptocurrency distribution to creditors to keep customers on the platform. Without this, the Company would not have continued.

Despite the initial uncertainty and loss, Digital Surge has retained 70% of customers and has continued to grow and develop its platform since exiting administration.

The Digital Surge matter received the Turnaround Management Association (TMA) Australia Turnaround of the Year 2023 award in the small business category.