Three Arrows Capital has filed for bankruptcy in the US, highlighting the scale and reach of the leading crypto investment firm’s borrowing across the industry before going into liquidation this week.
The Chapter 15 bankruptcy filing in federal court in Manhattan late Friday came just days after Three Arrows was forced into liquidation in the British Virgin Islands after allegations it did couldn’t pay It owed $80 million to digital asset exchange Deribit. The US bankruptcy filing was filed to authorize lawyers hired to direct the winding up of Three Arrows in the British Virgin Islands, the Singapore-based fund’s legal domicile, to protect its US assets.
The failure of Three Arrows, which used credit Turbocharged his bets on cryptocurrencies, is the latest sign of how this year’s turmoil in digital asset markets has caught some of the industry’s biggest players flat-footed. It also shows how problems at one company can spill over into the entire sector due to opaque connections between investors, crypto exchanges and lending firms.
Insolvency specialists at Teneo, the consulting company appointed in the British Virgin Islands Liquidating Three Arrows told the US court that a “substantial number of creditors” are likely to file claims against the hedge fund.
Deribit, a derivatives-focused crypto trading platform, had entered liquidation proceedings in the British Virgin Islands last week, with Three Arrows later agreeing to go into liquidation. However, Three Arrows is also in arbitration proceedings in New York with one of its largest creditors, Russell Crumpler, one of the company’s liquidators, said in a US court filing.
“As many creditors attempt to enforce their rights to collect the debtor’s outstanding debt, the risk that the debtor will squander its assets without considering each individual lender’s ability to recover its losses has increased,” Crumpler said.
In a sign of the extent of Three Arrows’ borrowing, Toronto-listed crypto lender Voyager Digital said in late June it could more than lose $650 million in loans it went to the crypto investment firm co-founded by Su Zhu and Kyle Davies. Voyager said late Friday that it was suspending payouts and trading on its platform while it explored “strategic alternatives.” It added that it is “actively pursuing all available legal remedies to restore Three Arrows.”
BlockFi, another major crypto lender, said Friday it held its ground $80 million loss due to the collapse of the Three Arrows even after some of his positions were wound up. BlockFi also announced a deal on Friday in which FTX will provide it with new funding in exchange for an option that would allow the crypto exchange to buy the group for up to $240 million.
Three Arrows is also facing regulatory scrutiny in Singapore. The Monetary Authority of Singapore reprimanded the group this week for providing false information and violating an asset-under-management threshold. City-state authorities said they had been investigating Three Arrows for a year. The fund was initially managed in Singapore before moving to the British Virgin Islands in September.
Three Arrows gained prominence during the peak of the crypto bull market, which peaked in November 2021. Zhu advanced a “super cycle” thesis, in which increasing mainstream acceptance meant prices would continue to rise without relapsing into a short-term bear market. However, as investors have been running away from speculative assets this year, the crypto market has come under severe pressure. The market value of the top 500 crypto tokens has collapsed from a peak last November of $3.2 trillion to under $1 trillion.
Three Arrows did not respond to a request for comment on its liquidation. Zhu said on Twitter last month, “We are in the process of communicating with relevant parties and are committed to clarifying this.”