Downfall: Three Arrows Capital’s collapse explained
By Carine Lee
03:07, 29 July 2022
What made one of the top firms in the cryptosphere, which at its peak managed around $18bn in crypto assets, tumble and fall towards the exploration of a financial bailout or asset sale?
Three Arrows Capital (3AC), a crypto hedge fund, tumbled when it suffered heavy losses due to the collapse of LUNA and Terra as it held a significant position in the two assets, roughly $560m at its peak.
3AC, co-founded by Zhu Su and Kyle Davies, is a Singapore-based crypto hedge fund operator, which has invested in tokens including ETH, SOL and LUNA (the original LUNA has since been replaced by LUNA2).
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The founders ran and defaulted on loans after the crypto hedge fund went bust from making a series of large directional trades (GBTC, LUNA, stETH) and borrowing from more than 20 institutions.
Legal proceedings then moved forward as the founders were nowhere to be seen.
A court document, filed with the Singapore High Court, was leaked, it asked the Singapore government to recognize liquidation proceedings and cooperate with liquidators.
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Several easter eggs were found in the document:
3AC owes over $3bn and Genesis is its biggest creditor with $2.3bn loaned. 3AC’s default on debts also contributed to the insolvency of Celsius Network and Voyager Digital.
It was not until June that creditors realised 3AC was collapsing as it pitched to investors on a new opportunity to save the company; Davies tried to arrange a new loan from Genesis to pay margin call; and only in mid June that 3AC insolvency was reported.
Zhu was also spendthrift, as the co-founder bought two Singapore ‘Good Class Bungalows’ and a yacht. It is also likely that the yacht was purchased on borrowed money as it was used as proof of 3AC’s creditworthiness.
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It seems that lenders did not do their homework and ended up lending money to a crypto hedge fund which has a combination of poor risk management, recklessness in dealing with business partners, and greed were the recipe for disaster.
It was recently brought to light that Davies’ wife and Zhu are creditors in the suit against 3AC, claiming that 3AC owes them money.
The duo finally broke their silence, with Zhu saying: “Given that we had planned to move the business to Dubai, we have to go there soon to assess whether we move there as originally planned or if the future holds something different for us,” in the report.
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