Crypto hedge fund Three Arrows files for US bankruptcy

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 failed to pay $80 million it owed to digital asset exchange Deribit owed. 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 loans to fund its cryptocurrency bets, 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.

Bankruptcy specialists at Teneo, the British Virgin Islands consulting firm hired to liquidate Three Arrows, told the US court that a “substantial number of creditors” are expected 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 sought to enforce their collection rights on the debtor’s outstanding debt, the risk of the debtor squandering its assets without considering each individual lender’s ability to recover its losses increased,” Crumpler said.

In a sign of the extent of Three Arrows’ borrowing, Toronto-listed crypto lender Voyager Digital said in late June that it could lose more than $650 million in loans it had to the crypto investment firm co-founded by Su Zhu and Kyle Davies has forgiven. 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 on Friday that it suffered around $80 million in losses due to the collapse of Three Arrows, even after liquidating some of its positions. BlockFi also announced a deal on Friday in which FTX will provide 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. Singapore’s Monetary Authority this week rebuked the group for providing false information and exceeding a threshold for assets under management. 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 “supercycle” 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 below $1 trillion from a peak of $3.2 trillion last November.

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.”

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