Key Takeaways
- • Three Arrows Capital (3AC), a crypto hedge fund that managed about $10 billion as recently as March 2022, is headed to bankruptcy court after failing to meet margin calls, according to CNBC.
- • The fund's collapse was triggered by the May 2022 implosion of TerraUSD (UST) and sister token luna, which cost investors an estimated $60 billion in panic selling.
- • 3AC's lenders and counterparties were hit with losses, including roughly $670 million owed to Voyager Digital, which filed for Chapter 11 bankruptcy protection, and an estimated $270 million hit to Blockchain.com.
- • Crypto lenders BlockFi, Genesis, BitMEX and FTX are also reportedly exposed, as the crypto market has lost more than $1 trillion in value since April.
- • Court documents reviewed by CNBC indicate 3AC's founders, Zhu Su and Kyle Davies, have not cooperated with creditors 'in any meaningful manner,' and liquidation has not begun.
Summary
Three Arrows Capital, also known as 3AC, was once one of the most prominent crypto hedge funds in the world, managing about $10 billion in assets as recently as March 2022, according to CNBC. The firm is now headed to bankruptcy court after a sharp decline in cryptocurrency prices and a high-risk trading strategy wiped out its assets and left it unable to repay lenders. The fund had borrowed capital across the industry and invested it in other, often early-stage, crypto projects.
The collapse traces back to May 2022, when TerraUSD (UST), a widely used dollar-pegged stablecoin, lost its peg. UST's stability relied on complex code with limited hard-cash backing, and its accompanying Anchor lending platform offered 20% annual yields that many analysts considered unsustainable. Panic selling tied to UST and luna cost investors an estimated $60 billion. 3AC told the Wall Street Journal it had invested $200 million in luna, though other industry reports put its exposure near $560 million. Bank of America strategist Alkesh Shah said such projects with unsustainable yields were exposed as risk assets corrected.
As lenders issued margin calls, 3AC lacked the cash to meet them, and many counterparties were in turn unable to satisfy their own investors. Voyager Digital filed for Chapter 11 after 3AC failed to repay roughly $670 million it had borrowed, and Blockchain.com reportedly faces a $270 million hit on loans to the fund. BlockFi, Genesis, BitMEX and FTX are also reportedly affected. Nic Carter of Castle Island Ventures said lenders were withdrawing liquidity from crypto as solvency was tested.
Court documents reviewed by CNBC show creditors' lawyers allege that founders Zhu Su and Kyle Davies have not cooperated 'in any meaningful manner,' and that liquidation has not started. Zhu and Davies did not immediately respond to requests for comment. Nik Bhatia, a finance professor at the University of Southern California, said 3AC 'was supposed to be the adult in the room' and described the episode as the first domino in a chain of leverage and fraud.
The collapse traces back to May 2022, when TerraUSD (UST), a widely used dollar-pegged stablecoin, lost its peg. UST's stability relied on complex code with limited hard-cash backing, and its accompanying Anchor lending platform offered 20% annual yields that many analysts considered unsustainable. Panic selling tied to UST and luna cost investors an estimated $60 billion. 3AC told the Wall Street Journal it had invested $200 million in luna, though other industry reports put its exposure near $560 million. Bank of America strategist Alkesh Shah said such projects with unsustainable yields were exposed as risk assets corrected.
As lenders issued margin calls, 3AC lacked the cash to meet them, and many counterparties were in turn unable to satisfy their own investors. Voyager Digital filed for Chapter 11 after 3AC failed to repay roughly $670 million it had borrowed, and Blockchain.com reportedly faces a $270 million hit on loans to the fund. BlockFi, Genesis, BitMEX and FTX are also reportedly affected. Nic Carter of Castle Island Ventures said lenders were withdrawing liquidity from crypto as solvency was tested.
Court documents reviewed by CNBC show creditors' lawyers allege that founders Zhu Su and Kyle Davies have not cooperated 'in any meaningful manner,' and that liquidation has not started. Zhu and Davies did not immediately respond to requests for comment. Nik Bhatia, a finance professor at the University of Southern California, said 3AC 'was supposed to be the adult in the room' and described the episode as the first domino in a chain of leverage and fraud.
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