The Collapse of Three Arrows Capital and its Filing for Bankruptcy

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Three Arrows Capital, popularly known as 3AC, is in deep trouble. A judge has issued a court order against it. The company owes $80 million to a digital currency exchange, Deribit. Three Arrows Capital is not able to clear it.

The court order has been issued in the wake of a liquidation occurring in the British Virgin Islands. Therefore, 3AC has opted for bankruptcy under Chapter 15. It is the only way it may protect its assets in the U.S.

Background of Three Arrows Capital (3AC)

Kyle Davies and Zhu Su, traders associated with Credit Suisse, founded Three Arrows Capital in 2012. They were schoolmates, too. Their venture turned out to be amongst the largest of crypto hedge funds, across the globe. The headquarters of the company is at Singapore.

How did Wall Street view this commercial venture? The company had just a few billion dollars in its bag. Therefore, it did not seem such a heavyweight. In contrast, the digital assets arena awarded 3AC, supreme importance!

The company continued to prosper, since its launch. Details about its journey over the years, are available at Bitcoin smart. The Hedge Fund went in for provision of high-quality, risk-adjusted returns. By March 2022, it was the owner of $10 billion in digital assets. The fund itself was worth at least $18 billion, at the peak of its performance in the marketplace.

Confident of ever-growing success, the founders purchased Bitcoin, along with other assets. They did so on leverage, using money supplied by Voyager and BlockFi (CeFi firms), and DAOs. Even the fall of Bitcoin to below $40,000, did not make a dent in their self-confidence.

3AC’s Fall from Grace

Nothing so drastic would have happened if the Hedge Fund had avoided borrowing large sums from other companies. However, Three Arrows Capital probably became too ambitious, and could not stop itself!

For instance, 3AC desired to enhance the size of its bets with Bitcoin and other digital currencies. Therefore, it asked for heavy loans from companies, who were all too willing to supply them. In turn, this led to bankruptcy.

The firm handling this case, is Teneo. It is an insolvency firm. It is supposed to be responsible for looking into the events that took place at the British Virgin Islands. Teneo has already conveyed something significant to the U.S. Court. According to its report, several creditors would be making claims against 3AC.

Currently, Deribit is engaged in a tussle with Deribit, the derivatives trading platform. It initiated the liquidation proceedings. The case is in progress at the British Virgin Islands. Three Articles Capital agrees with Deribit’s terms.

Russel Crumpler is a significant liquidator and creditor. Located at New York, this company is engaged in arbitration with 3AC. According to Crumpler many creditors believed that they had the right to force 3AC to pay its outstanding dues. After all, the debtor could dissipate the available assets. Three Arrows Capital would not consider each lender company’s ability to recover from its losses.

Voyager Digital and BlockFi

Regarding loans, 3AC owes over $670 million to Voyager Digital. The latter is a cryptocurrency brokerage firm. If the former is unable to repay the loan, Voyager Digital will have to sustain a huge loss. Therefore, it informed its fans that an exploration of strategic alternatives is underway. Towards this end, it was suspending all loyalty rewards programs, deposits, and withdrawals, for some time. It hopes this time should suffice for it to recoup some of its losses, if not all of them.

BlockFi is a crypto platform, dealing with trading and lending. Three Arrows Capital owes it $80 million. In other words, BlockFi must recoup losses worth this amount. Therefore, it has engaged in a deal with FTX U.S. BlockFi will provide the funds to FTX U.S., provided it gains an option to purchase 3AC. The deal is worth $240 million.

Conclusion

MAS is the Monetary Authority of Singapore. It has placed Three Arrows Capital under regulatory scrutiny. 3AC has already received a reprimand for supplying false information about its activities. The founders of 3AC had taken unnecessary risks.

The investigation has been in force for about a year. It is because 3AC shifted base from Singapore to the British Virgin Islands.