Three Arrows Capital (3AC): Rise and fall of a crypto hedge fund giant

What is Three Arrows Capital?

Three Arrows Capital (3AC) is a Singaporean cryptocurrency hedge fund founded in 2012 by Kyle Davies and Su Zhu.

The rise of Three Arrows Capital

At its peak, they backed successful and hugely popular cryptocurrency projects such as Aave, Ethereum, Polkadot, Solana, and WOO Network, among others. The Fund reportedly had a net asset value of US$18 million according to their last public statement.

Founders Kyle Davies and Shu Zu were also famous in the cryptocurrency space, with 49k and over 550k Twitter followers respectively.

The fall of Three Arrows Capital

The fall of Three Arrows Capital can be largely attributed to 3 factors: the Axie Infinity hack, the collapse of Terra (LUNA, UST) and failure to meet margin calls.

Axie Infinity hack

Axie Infinity was a “play to earn” blockchain game which at its peak had millions of players worldwide. However, declining popularity and becoming the victim of a US$700m hack in March 2022 caused a huge and seemingly irrevocable blow to the game.

Learn more- Axie Infinity: A lesson for the future of play-to-earn.

Collapse of Terra (LUNA, LUNC UST)

In 2018, Terra was founded by Do Kwon and Daniel Shin. Terra is an open-source blockchain that hosts decentralized applications (dApps) and developer tools. Terra has a native token- $LUNA (now $LUNC), which is used for governance and mining. LUNA has to be burned to mint UST at a ratio of 1:1. This was the only way to obtain UST and take advantage of the various interest rates through staking on the Terra ecosystem. This meant that LUNA was an algorithmic stablecoin i.e. a stablecoin that can only maintain its peg via software and rules.

The risk of these algorithmic stablecoins and why so far they have all failed is because of the “death spiral”. This is a series of events that inevitably led to the demise of a protocol. On 7th May 2022, over US$2 billion worth of UST was unstaked and hundreds of millions worth sold. This huge sale caused prices of UST to fall to 91 cent (i.e. it was no longer maintaining its peg). This caused huge panic in the market with UST holders frantically selling their UST to mitigate their losses, which pushed UST prices further down. A week later on 13th May 2022, prices of UST had already fallen to US$0.01.

Three Arrows Capital was unfortunately caught up in Terra’s collapse since it was heavily invested in LUNA. According to FatMan, a whistleblower posted on Twitter that Three Arrows Capital had bought 10.9 million locked LUNA for US$559.6 million. However, since the collapse, this LUNA was only worth US$670.45.

Failure to meet margin calls

As a result of suffering losses from the Axie Infinity hack, the Terra collapse, and the crypto market downturn, Three Arrows was unable to meet margin calls from its various lenders. According to the Financial Times, some of these lenders included US-based crypto lender BlockFi, which Three Arrows Capital had borrowed Bitcoin from and was now unable to repay.

Cryptocurrency options and futures exchange Deribit was also chasing down Su Zhu and Kyle Davies as they both kept a low profile since the collapse of Three Arrows Capital. Uncovered messages from Deribit Exchange’s representatives reveal that they have been trying to contact Su Zhu and Kyle Davies in vain. The messages also reveal that Deribit had sold US$85 million worth of BTC and ETH in an attempt to reduce Three Arrows’ position. Deribit also suggested that Three Arrows use their 32 million USDC as collateral.

Three Arrows Capital liquidation

Three Arrows Capital filed for Chapter 15 bankruptcy on 1st July 2022 in New York. The purpose of a chapter 15 bankruptcy is to prevent creditors from seizing a company’s assets located in the US. Meanwhile, liquidation proceedings will continue in the British Virgin Islands where Three Arrows is based.

According to court documents, Three Arrows Capital owed US$3.5 billion to 27 different companies including Voyager Digital. Voyager Digital is a publicly listed crypto brokerage firm which suspended trading and withdrawals shortly before the news of 3AC’s bankruptcy. Other sizable creditors included Genesis Global Trading, which had lent US$2.36 billion to Three Arrows Capital.

Court documents also gave insights as to the remaining assets owned by Three Arrows Capital. These consist of cryptocurrencies such as Bitcoin, Avalanche, and Near, as well as shares of Grayscale Bitcoin Trust and in Deribit. In total, these remaining assets are worth at least US$2.8 billion. In particular, the court document estimated the Deribit shares to be worth around US$500 million. However, as reported by CoinTelegraph, there are anonymous sources that claim the value of the Deribit shares is in fact only around $25 million. The consequence of this is it is possible there will not be sufficient assets to repay all of Three Arrows Capital’s creditors.

Su Zhu and Kyle Davies sues Three Arrows Capital.

Both Su Zhu and Kyle Davies’ whereabouts are currently unknown. Previously, the court issued an order allowing Three Arrows Capital liquidators to demand the pair attend court. It was also revealed that Zhu and Davies were uncooperative with their liquidators. According to a legal document filed by Three Arrows Capital’s liquidators, there were Zoom calls with a “Su Zhu” and “Kyle”. However, it could not be confirmed that it was indeed them because their video was switched off. Also, their audio was muted with neither of them speaking despite being asked questions.

However, it appears that whilst Su Zhu was filing a claim for US$5 million against Three Arrows Capital- his own fund. Kyle Davies also filed an affidavit stating that his wife, Kelli Chen also lent US$65.7 million to Three Arrows Capital.

Su Zhu and Kyle Davies buy a yacht with borrowed funds?

According to a legal document filed by the liquidators of Three Arrows Capital, Su Zhu and Kyle Davies made a down payment on a US$50 million yacht. The founders had boasted that the yacht would be larger than any owned even by Singapore’s richest billionaires. It is speculated that the yacht was purchased with borrowed funds.

Three Arrows Capital CEO Su Zhu to sell US$34.8mil bungalow after liquidation

CEO of Three Arrows Capital Su Zhu is apparently urgently trying to sell the US$34.8mil bungalow in Singapore after 3AC filed for bankruptcy. The 31,854 sq ft bungalow was purchased in December 2021 and was held on trust for his 6-year-old son. According to text messages circulating among property agents, the bungalow is being put up for “very urgent sale”

Zhu and his wife own 3 properties between them including the bungalow which they are planning to sell, spending over US$59.5 million.

Voyager Digital: A victim of the Three Arrows Capital collapse?

Voyager Digital is a publicly listed crypto brokerage firm. They suspended trading and withdrawals shortly before the news of Three Arrows Capital’s bankruptcy. They are also a major creditor of Three Arrows Capital.

Voyager Digital files for bankruptcy

Voyager Digital issued a Notice of Default against 3AC on 27th June 2022 and reduced its withdrawal limit to US$10k per day. This clearly spooked shareholders and users of Voyager Digital. The Company saw its share prices plunge more than 60% in the last week after it disclosed its ties with 3AC and its poor performance during the crypto downturn.

The Notice stated that 3AC failed to make timely repayments on its loan of 15,250 BTC and US$350 million USDC. However, Voyager Digital has reassured its users that its platform is still fully functional. Furthermore, as of 24th June 2022, Voyager had approximately US$137 cash and crypto assets on hand. The Company also has a US$200 milllon cash and USDC, and a 15,000 BTC revolving loan from Alameda Ventures Limited.

On 5th July 2022, Voyager Digital Holdings filed for bankruptcy in the Southern District of New York. Voyager Digital estimates it has over 100,000 creditors and total debts of somewhere between US$1 to US$10 billion in liabilities. The Company believes that notwithstanding its liabilities, it still has around US$1 to US$10 billion in assets. They also assure that will have sufficient funds available for distribution to its unsecured creditors.

According to a tweet by CEO Stephen Ehrlich, the purpose of filing for bankruptcy was to “…protect assets on the platform, [and] maximize value for all stakeholders.”

This is certainly a huge relief to Alameda Research. They are listed in court documents filed by Voyager as its largest unsecured creditor with over US$75million in unpaid debts. This is substantially larger than its second largest unsecured creditor with a US$9.7million claim.

Court documents filed by Voyager Digital
Court documents filed by Voyager Digital

Meanwhile, the share prices of Voyager Digital Ltd (VYGVF) plummeted by almost 12% as a result of this development. Share prices for the Company took a huge hit since it their involvement with 3AC was discovered. VYGVF share prices have been down nearly 89% since early June 2022.

Voyager Digital suspends withdrawals, will customers get their USD and crypto back?

According to the latest blog post from Voyager Digital, they are working to restore access to customers’ USD deposits. However, it does not mention of when withdrawals will be reopened. Voyager Digital also stated that customers’ USD in their Voyager cash account is held in a For Benefit of Customers account at the Metropolitan Commercial Bank of New York (and not by Voyager themselves) and is Federal Deposit Insurance Corporation insured.

As for customers’ cryptocurrencies, Voyager states that they have approximately US$1.3 billion worth of crypto assets on their platform. This is inclusive of its over US$650million claim against Three Arrows Capital.

Voyager has proposed a reorganization plan which is currently pending the approval of the Court. Customers will be able to select the following options with regards to their cryptocurrencies held by Voyager:

  1. Pro-rata share of cryptocurrencies;
  2. Pro-rata share of proceeds recovered from Three Arrows Capital;
  3. Pro-rata share of common shares in Voyager after it is reorganized; and
  4. Pro-rata share of existing Voyager tokens.

However, according to Voyager, this is not the finalized plan. Voyager’s customers will have the opportunity to vote on whether or not they agree with the reorganization plan. It is likely that it will be a long time before customers will have their funds and cryptocurrencies returned.