Digital Surge was one of Australia's top crypto exchanges in 2022, but unfortunately in December of that year, they entered voluntary administration. In March 2023, Digital Surge reopened their doors to new and existing users.
Many Aussie crypto investors (myself included) were curious how they could start up again when they owed their users money. And how could we be assured that something similar wouldn't happen again?
To help us understand the situation, we asked Dan Rutter, the co-founder and CEO of Digital Surge to answer some of our questions.
First things first, can you explain the events that led to Digital Surge's administration in December 2022?
Digital Surge's administration in December 2022 was a result of a series of events that unfolded over a few months. Our primary goal at Digital Surge has always been to provide the best rates for our customers. In August 2022, we introduced a new order routing system, a highly advanced trading engine designed to analyse the optimal trading path across multiple markets and cryptocurrencies, ultimately leading to improved cost savings for our customers.
To enhance the efficiency of our trading engine, we decided to onboard an additional liquidity provider, FTX, in September 2022. FTX had a strong global reputation and held an Australian Financial Services License (AFSL). We engaged with FTX's Australian CEO as part of our due diligence process. On October 30, Digital Surge was approved as a broker on FTX, and funds were transferred to the account.
Unfortunately, less than two weeks later, it became apparent that FTX was facing significant troubles. Despite our multiple attempts, including direct communication with FTX's Australian CEO, we were unable to retrieve the funds. On November 13, we received formal notification that FTX Australia had entered into voluntary administration. In accordance with legal advice, we suspended deposits and withdrawals to prevent a potential bank run and buy time to find the best solution for our customers.
Over the following three weeks, we explored various options for financial assistance from industry partners, seeking potential bailouts. Unfortunately, none of these efforts materialized. With no other viable choice, we made the difficult decision to enter voluntary administration, with the intention of restructuring the company and formulating a rescue plan to repay our customers. On December 8, KordaMentha was appointed as the administrator to oversee the process.
How has Digital Surge managed to begin operations again in February 2023?
After undergoing the administration process, Digital Surge resumed operations in February 2023. During the administration, KordaMentha, as the appointed administrator, had the responsibility of determining the best outcome for the creditors, which included Digital Surge's customers. As per their legal obligations, KordaMentha presented two options for the creditors to choose from: liquidation or a Deed of Company Arrangement (DOCA).
Multiple parties, including Digital Surge's directors, submitted DOCA bids. Digital Surge's rescue plan, outlined in their DOCA proposal, offered an initial repayment of 45% to customers, followed by quarterly payments over a period of 5 years, utilising the company's profits until customers were paid 100% of the AUD value they held. To demonstrate their commitment, Digital Surge's directors also contributed $1.25 million of their own funds. Additionally, cost reduction measures were implemented.
After careful consideration, KordaMentha determined that Digital Surge's proposal provided the most favourable outcome for creditors and recommended that they vote in favour of it. On January 24, the creditors voted to adopt the DOCA, and on February 15, control of the company was returned to its directors. Shortly thereafter, creditors with claims up to $250 were paid in full, and those with claims exceeding $250 received 57% of their claim. The Digital Surge platform reopened for trading, deposits, and withdrawals, marking the successful resumption of operations in February 2023.
What measures has Digital Surge put in place to stop something like this happening again?
In summary, the measures Digital Surge has put in place to prevent a similar situation from happening again include:
- Limiting Funds on Third-Party Liquidity Providers: Digital Surge has enforced a limit on the amount of funds stored with third-party liquidity providers. This helps to mitigate the risk associated with relying heavily on a single provider.
- Instant Fund Ejection: The platform has implemented a tech solution that enables the instantaneous ejection of all funds from a liquidity provider with a single click if there is perceived substantial risk. This streamlined process is crucial in managing multiple cryptocurrencies efficiently.
- Asset Storage Ratio: Digital Surge has implemented a cap on the ratio of assets stored in hot wallets, which are connected to the internet, versus cold wallets, which are securely stored offline. This ensures that the majority of assets are held in cold storage, enhancing security while still maintaining sufficient trading liquidity.
- Enhanced Due Diligence: The platform has revised its due diligence process when considering new liquidity providers. This includes adding additional rail guards, enhanced risk assessments and ensuring thorough evaluations are conducted.
- Managed Custody Solution: Digital Surge is actively working on building a managed custody solution for its customers. This solution aims to ensure that, regardless of external circumstances or events, customers' assets remain in their custody, reducing the risk of loss.
By implementing these measures, Digital Surge aims to strengthen its risk management practices, improve security, and provide enhanced protection for its customers' assets. These steps demonstrate the company's commitment to learning from past events and implementing safeguards to mitigate similar risks in the future.
Why should people trust Digital Surge after the events of December 2022?
After the events of December 2022, we understand that trust may have been eroded, and we deeply apologise for the distress and loss of funds experienced by our customers as a result of the FTX collapse. However, we want to assure you that regaining trust and rebuilding our customers' confidence is our utmost priority.
From the very beginning, our objective has been to act in the best interest of our customers. Despite the significant impact of the FTX collapse, we made the conscious decision not to take the easier route of liquidating the company and moving on. This decision was driven by our values and the commitment we have to our customers.
We have embarked on a mission to rebuild the platform and repay our customers in full for what they are owed. We understand that this will not be an easy task, and we acknowledge that some customers may have lost trust in us. However, we want to assure you that we are fully dedicated to regaining that trust and credibility.
To foster transparency and open communication, we have initiated monthly Ask Me Anything webinars with the company directors. During these sessions, we provide updates on the company's progress and address questions from our customers directly. We believe that this level of engagement is crucial in rebuilding trust and demonstrating our commitment to transparency.
Furthermore, we are in the process of forming a customer advisory board. This initiative will provide us with a platform to share information about our operations and seek input from our customers regarding their priorities and concerns. We value our customers' feedback and believe that involving them in the decision-making process is essential to rebuilding trust and ensuring that their interests are at the forefront of our operations.
We are fully aware of the challenges ahead, but we are committed to learning from past mistakes, implementing necessary safeguards, and rebuilding trust one step at a time.
What happened to the money that is owed to Digital Surge customers?
The funds owed to Digital Surge customers, which amounted to $33 million in cryptocurrency and AUD, were held in the FTX account that became inaccessible following the collapse of FTX. As part of the administration process, KordaMentha was appointed as the Trustee and established a Creditors Trust to handle the debts owed to Digital Surge.
KordaMentha is responsible for managing and seeking recovery of the debt owed to Digital Surge from FTX. If any funds are recovered, they will be deposited into the Creditors Trust. The distribution of these funds will be determined by KordaMentha and will be done in accordance with the legal requirements and the agreed-upon distribution plan.
Why should someone that is still owed money by Digital Surge continue to use the exchange?
While it's understandable that being owed money by Digital Surge can create concerns, there are several reasons why individuals in this situation may consider continuing to use the exchange:
- Revenue Generation: By using Digital Surge for trading, customers contribute to the overall trading volume and transaction fees. The higher the trading volume, the more revenue Digital Surge generates. This revenue will be used to repay customers, as part of the company's commitment to fulfilling its obligations.
- Improved Safety Measures: Digital Surge has taken the lessons learned from the FTX collapse seriously and has implemented measures to enhance the security and reliability of its platform. By implementing stronger risk management protocols and improving the overall infrastructure, Digital Surge aims to prevent a similar event from happening again. This focus on safety provides reassurance to users.
- Commitment to Customers: Digital Surge has demonstrated a commitment to its customers by going above and beyond to rectify the situation. The company has established a recovery plan and taken steps to repay customers what they are owed. Additionally, Digital Surge continues to prioritize superior customer service and competitive trading rates, showing their dedication to meeting the needs of their users.
Are there any changes to the platform such as higher fees or wider spreads, to try to increase profits for Digital Surge?
No, there have been no changes to the platform that involve higher fees or wider spreads aimed at increasing profits for Digital Surge. In fact, the implementation of the new Order Routing System has allowed Digital Surge to maintain highly competitive fees and spreads for its customers, while generating higher revenue margin due to the improved efficiency.
Furthermore, Digital Surge is exploring the development of a new revenue stream by offering extremely competitive rates for large over-the-counter (OTC) trades. This presents an opportunity to expand the platform's services and generate additional revenue without compromising the competitiveness of the fees and spreads offered to customers.
Overall, Digital Surge's focus remains on providing customers with competitive rates and maintaining a high level of service while exploring avenues for revenue growth that align with customer needs and market trends.
