The co-founder and former CEO of Voyager Digital Ltd. violated derivatives rules while running the cryptocurrency lender, leading to its bankruptcy and $1.7 billion in customer losses.

The Commodity Futures Trading Commission filed suit against Stephen Ehrlich in a US federal court in New York, alleging that he and Voyager “fraudulently solicited and operated a platform for trading and storing digital assets”. The agency accused the company of luring customers with promises of returns of up to 12 per cent on some cryptocurrencies and making misleading statements about the platform’s security.

Through these enticing promises, Voyager facilitated billions of dollars worth of trades in digital assets that were commodities, including Circle’s bitcoin and USD Coin, according to the CFTC.

Voyager was one of the domino knuckles that fell in the cryptocurrency chaos of 2022. The industry is still reeling from the turmoil, which culminated in the collapse of cryptocurrency trading giant FTX. Last week, the criminal trial of FTX co-founder Sam Bankman-Fried began in New York.

Ehrlich is also being sued by the U.S. Federal Trade Commission for allegedly making false statements about former Voyager customers having Federal Deposit Insurance Corporation protection. The FTC said in a press release Thursday that Ehrlich assured customers that their deposits were safe, even though the company was nearing bankruptcy.

In a statement, Ehrlich said he was “outraged and deeply shocked” by the CFTC and FTC’s allegations and that he was being used as a “scapegoat for the bad actions of others.” He added that he hopes to be vindicated in court. Ehrlich added that he and his team at Voyager have always worked closely with regulators.

Voyager entered into a settlement agreement with the agency and agreed to a permanent ban on dealing with consumer assets without admitting or denying the allegations.

The CFTC alleged that Voyager transferred more than $650 million in customer assets to a digital asset hedge fund referred to as “Firm A.” The company made the transaction despite warnings of high risk and extremely poor financial disclosure by the hedge fund.

According to the regulator, Firm A refused to provide financial statements, instead sending a one-sentence letter titled “AUM Letter” that claimed to show net asset value, without any supporting documentation. AUM stands for assets under management.