The complete review of the failure of Three Arrows Capital: The impact on the cryptocurrency market is nearing its end

Author: Qin Xiaofeng, Odaily Planet Daily

On July 12, Zhu Su, the founder of Three Arrows Capital, who had been silent for nearly a month, tweeted again: "Unfortunately, our good faith in cooperating with the liquidators has been misled. I hope they (the liquidators) will act in good faith regarding the StarkWare token warrants."

In the tweet (which has restricted user comments), Zhu Su also attached two screenshots of emails, showing his desire to proceed with the liquidation process, but the creditor and liquidator Russell pretended to offer help and negotiated a liquidation plan, while actually extracting internal information and submitting materials from the coordination process to the court, hindering the liquidation process.

The lawyer representing Three Arrows Capital also stated that the creditor's failure to fulfill the commitment to acquire equity in StarkWare has caused the company to suffer losses and has had a series of adverse effects.

Zhu Su's "appearance" can be seen as a response to the recent rumors of his complete disappearance.

On July 8, financial consulting firm Teneo stated in documents submitted to the U.S. Bankruptcy Court for the Southern District of New York that Three Arrows founders Zhu Su and Kyle Davies refused to cooperate with the liquidation and were missing, and the two may attempt to transfer the company's assets to external accounts (to evade debts). The news of the two founders' disappearance was also confirmed by Three Arrows' lawyers, and with nearly a month having passed since Zhu Su's last appearance on social media (June 15), discussions about Zhu Su intensified.

However, apart from this self-explanatory tweet that "shifted blame" onto the liquidators, there has been no new response from Three Arrows, and neither of the two founders attended the court hearing held in New York on July 12.

Ultimately, the U.S. court froze Three Arrows' remaining assets in the U.S. and appointed Teneo as the bankruptcy liquidator with the right to dispose of the related assets. The latest news is that the first meeting of Three Arrows creditors, hosted by Teneo, will be held on July 18, with the specific agenda still unclear, but subsequent developments will be announced on the designated official website (https://3acliquidation.com/).

The collapse of Luna accelerated the bear market, followed by several CeFi institutions collapsing like a house of cards, which is quite lamentable. However, for more than a month, Celsius has continued to repay over $800 million across various DeFi protocols, gradually redeeming collateral, BlockFi has also secured multiple rounds of loans and confirmed its acquisition by FTX, and other small and medium-sized institutions have made some progress… Only the "originator" Three Arrows remains shrouded in rumors, creating a suspenseful drama.

As a top fund that once managed hundreds of billions of dollars in assets, how large is Three Arrows' debt scale, who are the creditors, and how much asset is left on the books? Can creditors recover part of their debts by suing Three Arrows? What are the difficulties in the game between the two parties? Is the impact of Three Arrows' debt crisis on the crypto financial market nearing its end? Odaily Planet Daily will attempt to answer these questions based on various sources of information.

(1) Three Arrows and Its Creditors

"We are communicating with the relevant parties and are committed to resolving the issues." On June 15, after leaving this tweet, Zhu Su disappeared. At that time, Three Arrows was rumored to be in a liquidity crisis, insolvent, causing market panic, and Zhu Su's tweet undoubtedly validated some of the speculations.

The root of the collapse lies in Three Arrows' misjudgment of the situation, continuously going long on Bitcoin and other crypto assets through circular collateralized lending and leverage. As the market declined, massive margins and collateral were successively liquidated, and the previously invested LUNA also incurred losses of hundreds of millions of dollars, directly leading to liquidity exhaustion and triggering a market spiral decline, with Bitcoin dropping below $18,000 at its lowest. Odaily Planet Daily previously published an analysis of Three Arrows' collapse, recommending reading "The Great Defeat of Three Arrows Capital: The First Holder of ETH in a Liquidity Crisis."

Regarding the specific scale of Three Arrows' debts, the market does not have a clear understanding, especially since some creditors are afraid of causing panic withdrawals among users and dare not proactively expose what they know, even wanting to distance themselves from Three Arrows.

In the past month, as market sentiment stabilized, a series of events gradually resolved, and Three Arrows' creditors began to surface: Voyager Digital, BlockFi, Deribit, Blockchain.com, Genesis, DeFiance Capital, TureFi, and several DeFi protocols invested by Three Arrows.

The highest debt belongs to crypto brokerage Voyager Digital. The company lent Three Arrows 15,250 Bitcoin and $350 million in unsecured loans; if BTC is calculated at $20,000, the total value is approximately $655 million. On the day the news broke, Voyager Digital's stock price plummeted over 60%, with a cumulative decline of 86% to date.

Due to a depletion of funds, Voyager Digital reduced its daily withdrawal limit from $25,000 to $10,000 and restricted the number of daily withdrawals; on the other hand, it sought short-term debt support from Alameda, obtaining a $200 million and 15,000 BTC revolving credit line, but still could not save the collapsing tower. On July 6, Voyager Digital announced the suspension of all customer trading, deposits, and loyalty rewards, and officially initiated bankruptcy reorganization processes, applying for bankruptcy protection, planning to repay user assets through repayments from Three Arrows, distribution of new shares, and remaining tokens on the platform.

However, how much cryptocurrency customers will ultimately be able to recover remains an unknown.

From once the most promising crypto economic merchant in North America to bankruptcy liquidation, Voyager Digital's experience is quite lamentable. Another crypto lending platform, BlockFi, is also facing a low-price acquisition situation due to Three Arrows' debts.

According to leaked recordings from a Morgan Creek investor conference call, BlockFi had previously provided about $1 billion in loans to Three Arrows, with collateral being two-thirds Bitcoin and one-third GBTC, with an over-collateralization rate of 30%; as BTC prices fell, BlockFi liquidated Three Arrows' collateral, with specific losses unknown. After Three Arrows' bankruptcy, BlockFi also actively sought external financing, but the latest valuations offered by several parties were far below BlockFi's $5 billion valuation from last year. Ultimately, BlockFi chose FTX US (with a $240 million acquisition option + $400 million revolving credit line), planning to complete the acquisition in the fall of 2023.

Three Arrows' creditors also include several trading platforms and crypto market makers. Among them, the cryptocurrency trading platform Blockchain.com faces a loss of $270 million due to loans provided to Three Arrows; the company announced that its liquidity is sufficient and that customers have not been affected.

Crypto market maker and lending company Genesis also suffered losses exceeding $100 million, but its parent company, Digital Currency Group (DCG), has strong financial resources and has assumed part of the debt, ensuring its continued operation.

The crypto derivatives platform Deribit explicitly stated that Three Arrows, as a shareholder of its parent company, indeed has liabilities on some minority accounts, but this will not affect its operations; Deribit is financially healthy and willing to bear the losses.

The reason for the trading institutions' losses is that when the market declines and falls below the liquidation line, these institutions did not immediately liquidate Three Arrows' margin but gave it time to make up for the margin (a common practice in the industry), but ultimately Three Arrows defaulted, resulting in losses.

Additionally, Three Arrows has been accused of misappropriating customer funds. Danny, the trading director at 8 Blocks Capital, stated that while trading using a Three Arrows trading account, approximately $1 million was taken from the account by Three Arrows.

According to anonymous sources, 3AnonCompany revealed that since its establishment in 2018, Three Arrows has launched structured credit products with yields of 10% - 15%, "the lenders include small trading platforms, individuals, and companies, and Three Arrows has always skillfully misappropriated customer funds when trading with counterparties, as if using its own money." Some of Three Arrows' investment projects also return investment funds to Three Arrows for management, including Kyber Network, crypto savings application Finblox, etc., but these funds are currently also unaccounted for.

Three Arrows' creditors also include: institutional lending platform TureFi, $2 million, originally planned to be repaid in August; Web3 venture capital firm DeFiance Capital, with specific debts unknown; and Three Arrows Capital's OTC department TPS Capital also stated that it is one of Three Arrows Capital's debtors.

According to Terra researcher FatMan, Three Arrows' total debt is approximately $2 billion, with existing assets around $400 million, and liabilities of $1.6 billion; anonymous source 3AnonCompany tweeted that Three Arrows currently has over $2 billion in unpaid debts but only $200 million in liquid assets (due to poor liquidity, making it difficult to assess the actual repayable amount).

(2) Multiple Lawsuits vs. Bankruptcy Protection

On June 24, Voyager Digital sent a default notice to Three Arrows Capital but received no feedback, casting a shadow over the creditors' minds. Although many creditors have tried to liquidate Three Arrows' assets at the first opportunity, they still failed to timely mitigate their losses.

As Three Arrows' debt gap widened, creditors became restless and began suing in multiple locations, attempting to obtain priority compensation. DeFiance Capital stated that it is considering legal action against Three Arrows Capital, or taking forms such as arbitration, litigation, or bankruptcy proceedings to amend, demanding Three Arrows Capital repay as a creditor.

Blockchain.com and Deribit were among the first to become plaintiffs in the rights protection lawsuits, filing a lawsuit in the British Virgin Islands (BVI) to apply for the liquidation of all Three Arrows Capital's assets. "We believe Three Arrows Capital has deceived the crypto industry and intend to hold them accountable to the fullest extent of the law; we have applied for the immediate liquidation of all Three Arrows Capital's global assets." (Note: Three Arrows is headquartered in Singapore but is registered in the British Virgin Islands, and is being sued based on territorial jurisdiction principles.)

On July 1, the BVI court ordered the liquidation of all Three Arrows' assets and appointed global consulting firm Teneo Restructuring to manage 3AC's bankruptcy affairs—Teneo primarily focuses on protecting the assets of the liquidated company and determining who its creditors are. Teneo subsequently appointed two partners, Russell Crumpler and Christopher Farmer, as joint liquidators and established a website where creditors can file claims against Three Arrows.

Meanwhile, the Monetary Authority of Singapore (MAS), where Three Arrows is headquartered, also issued a warning and will investigate its violations. (https://www.mas.gov.sg/regulation/enforcement/enforcement-actions/2022/mas-reprimands-three-arrows-capital-for-providing-false-information-and-exceeding-assets-under-management-threshold) The official announcement stated that Three Arrows Capital provided false information, and its assets under management (AUM) exceeded the limits for registered fund management companies. Specifically, Three Arrows had transferred the management rights of its funds to an unrelated offshore entity since September 1, 2021, without notifying the MAS of changes in directors and equity; in addition, Three Arrows has long violated the AUM threshold, exceeding its allowed RFMC asset management scale of 250 million Singapore dollars. "MAS is assessing whether it has further violated MAS regulations."

MAS Announcement

Three Arrows has also taken countermeasures. To avoid imprisonment, Zhu Su has collaborated with Advocatus Law LLP, a law firm in Singapore specializing in white-collar crime cases, with one of the firm's founders, Christopher
(https://www.legal500.com/firms/34334-advocatus-law-llp/34824-singapore-singapore/lawyers/491439-christopher-anand-daniel/) serving as the lead attorney responsible for Three Arrows' debt litigation issues. The well-qualified Christopher has applied for bankruptcy under Chapter 15 of the U.S. Bankruptcy Code to protect Three Arrows' assets in the U.S.

It is important to note that U.S. bankruptcy liquidation typically has the following types: Chapter 7, which directly liquidates bankruptcy, and the company immediately enters the liquidation phase; Chapter 11, where the company can negotiate with creditors regarding restructuring; while the Chapter 15 applied for by Three Arrows is usually a secondary bankruptcy procedure for foreign individuals or entities, previously used by Luckin Coffee—where the main bankruptcy process occurs in the home country of the foreign company (Three Arrows' headquarters in Singapore), and until the liquidation is completed, Three Arrows' assets in the U.S. cannot be obtained by other creditors.

Three Arrows' intentions are clearly not lost on the creditors. To prevent Three Arrows from transferring assets, the creditors jointly filed a lawsuit in the U.S. Bankruptcy Court for the Southern District of New York, requesting the freezing of Three Arrows Capital's remaining assets in the U.S. According to documents submitted by the creditors, the two founders of Three Arrows are not cooperating with the liquidation process, refusing to communicate during conference calls, and leaving it to their lawyers to handle; creditors' lawyers who visited Three Arrows' Singapore office found that the office had been abandoned; Zhu Su and Kyle Davies are missing, and they may attempt to transfer the company's assets to external accounts, which poses a high risk.

As a result, the New York court held an emergency hearing for creditors, with neither founder in attendance. Ultimately, the court granted the creditors provisional relief to prevent Three Arrows from transferring or disposing of assets within the U.S. and appointed Teneo as the bankruptcy liquidator with the right to dispose of the related assets (Note: under "provisional relief," foreign representatives have the right to issue subpoenas to Three Arrows' founders, requiring them to produce documents and testimony).

In response to the creditors' claims of being "missing," Zhu Su countered by releasing two email screenshots between his attorney and the debt liquidator (Teneo) (https://twitter.com/zhusu/status/1546801270014758912):

The first email shows that Zhu Su's "disappearance" was due to "personal violence threats" against him and his family, and that he "has been under great pressure" when facing inquiries from MAS, but the debt liquidator did not truthfully reflect this situation to the court;

The second email shows that the liquidator did not execute the agreed StarkWare token warrant agreement, which "resulted in [3AC] losing considerable value." Three Arrows participated in StarkWare's $75 million Series B financing in March 2021, and the warrant expired on July 5. Due to the liquidator's failure to fulfill the StarkWare token acquisition offer, the StarkWare token is now gone.

Two emails released by Zhu Su

Who is right and who is wrong remains to be determined, with both sides holding firm to their positions. The latest news is that the first meeting of Three Arrows Capital creditors will be held on July 18, hosted by Teneo, with the specific agenda still unclear, but the latest news will be synchronized on the dedicated website (https://3acliquidation.com/).

(3) What Are the Difficulties in Liquidation?

Although creditors have received support from courts in various locations, this bankruptcy liquidation of Three Arrows is destined to leave creditors dissatisfied.

Unlike traditional financial bankruptcy liquidations, crypto finance has its peculiarities, mainly in the recovery of on-chain assets.

Without the cooperation of the founders, the liquidators cannot fully understand all of Three Arrows' crypto assets, and some transferable tokens remaining in their on-chain wallets cannot be seized; moreover, the founders or other parties may secretly transfer them. Currently, NFTs from Three Arrows' NFT fund Starry Night have been transferred to a new wallet for unknown reasons.

For creditors, the few assets that can be seized include:

First, GBTC assets. Currently, the market price of GBTC is $13.13 per share, with a fair market value of $18.98, a discount of over 30%; according to announcements from early 2021, Three Arrows held over 10% of GBTC shares, with the specific proportion currently unknown. Once this portion of assets is liquidated to repay debts, it will inevitably further depress the price of GBTC.

Second, assets in exchange or custody accounts. According to the rights granted by the U.S. Bankruptcy Court, creditors can issue subpoenas to U.S. regional crypto trading platforms, requiring cooperation with the liquidation. However, considering that institutions like BitMex, Blockchain.com, and FTX have already liquidated most of Three Arrows' collateral, the scale of remaining assets may not be very large, with little impact on the market.

Third, investment equity/tokens. Three Arrows previously invested in dozens of startups, and there are still some tokens in contracts that have not been unlocked, as well as equity in projects that have not issued tokens, which can be considered as liquidation assets, although their liquidity is not high. Additionally, some investment institutions (such as TPS Capital) have published statements distancing themselves from Three Arrows, which also increases the difficulty for creditors to pursue claims.

In addition to crypto assets, the tangible assets of Three Arrows and Zhu Su personally should not be overlooked.

Registration records in Singapore (https://twitter.com/FatManTerra/status/1542814136886771712) show that Three Arrows Capital controls five high-end properties, including three GCBs (Singapore's premium bungalows), one shophouse, and one townhouse, with other assets including a number of luxury cars and a yacht (Note: GCB is the top category of private residential real estate in Singapore, with only about 2,800 such properties in the entire country).

Zhu Su's bungalow in Singapore

Among them, a property valued at $48.8 million is held under the name of Zhu Su's daughter through a trust fund, and his wife has a new house under construction (valued at $28.5 million), while the yacht, purchased last year, is valued at $50 million, with only the down payment made. Researcher FatMan (https://twitter.com/FatManTerra/status/1542490257186226180) tweeted that a source confirmed that Zhu Su is urgently trying to sell the mansion under his daughter's name, requesting to transfer the funds to a bank account in Dubai, with no intention of using the proceeds to repay creditors.

The status of other tangible assets under Zhu Su's name is currently unknown and requires creditors to initiate lawsuits in courts around the world for investigation. Currently, Teneo has moved to East Asia, applying to the Singapore High Court for provisional relief, allowing Teneo to manage Three Arrows' assets in Singapore and summon co-founders Zhu Su and Kyle Davies. If the court approves, Three Arrows and Zhu Su's assets in Singapore will be frozen and cannot be transferred.

(4) Final Thoughts

In just two months, Three Arrows Capital has transformed from a top fund managing hundreds of billions in assets, wielding significant influence in the industry, to a defendant with debts of billions, prompting one to reflect: the once-great wealth was merely a facade built on high leverage and circular borrowing.

Moreover, the collapse of Three Arrows is by no means an isolated incident; many centralized crypto institutions have exposed the long-buried flaws during this crisis: repeated use of leverage, unsecured credit loans, multi-angle debts, and misappropriation of user assets, with various opaque violations surfacing.

The frequent occurrence of such cases will inevitably accelerate regulation and scrutiny of cryptocurrencies. Now, the consequences of this violent reshuffle are gradually being realized in the market and are nearing their end, with the market stabilizing recently. We also look forward to the rebirth of the crypto financial market.