A complete review of Three Arrows Capital’s failure: The impact on the crypto market is coming to an end

On July 12, Zhu Su, the founder of Three Arrows Capital, who had been silent for nearly a month, tweeted again: “Regrettably, our sincerity in cooperating with the liquidators was misled. I hope they (the liquidators) will exercise good faith in the StarkWare token warrants.”

In the tweet (user comments have been restricted), Zhu Su also attached two screenshots of emails, showing that he hoped to follow the liquidation process, but the creditor and liquidator Russell pretended to provide help and negotiate a liquidation plan, but actually obtained internal information and submitted the materials in the coordination process to the court, which hindered the liquidation process.

Lawyers for Three Arrows Capital also stated that the creditors’ failure to fulfill their commitment to acquire StarkWare’s equity caused the company to suffer losses and produced a series of adverse effects.

Zhu Su’s “appearance” can be said to be a response to the recent rumors that he has completely lost contact.

On July 8, financial consulting firm Teneo filed a document with the U.S. Bankruptcy Court for the Southern District of New York stating that Three Arrows founders Zhu Su and Kyle Davies refused to cooperate with liquidation and their whereabouts were unknown. They may try to transfer company assets to external accounts (to evade debt). The news of the two founders' disappearance was also confirmed by Three Arrows' lawyers. In addition, it has been nearly a month since Zhu Su last appeared on social platforms (June 15), and rumors about Zhu Su have intensified.

But apart from this tweet of self-explanation and "blaming" the liquidator, Three Arrows has not given any new response, and both founders did not attend the court hearing held in New York on July 12.

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

Luna's plunge accelerated the bear market, and then several CeFi institutions collapsed like dominoes. However, for more than a month, Celsius has continued to repay more than $800 million in loans in various DeFi protocols and redeemed collateral. BlockFi has also received multiple rounds of loans and confirmed that it will be acquired by FTX. Some other small and medium-sized institutions have also made progress... Only the "instigator" Sanjian has endless gossips about it, making it a suspenseful drama.

As a top fund that once managed tens of billions of dollars in assets, how big is the debt scale of Three Arrows, who are the creditors, and how much assets are still on the account? If the creditors sue Three Arrows, can they get back part of the debt? What are the difficulties in the game between the two parties? Is the impact of the Three Arrows debt crisis on the crypto financial market coming to an end? Odaily Planet Daily will try to answer the above questions based on information from various parties.

(1) Three Arrows and His Creditors

"We are communicating with the relevant parties and are committed to resolving the issue." On June 15, Zhu Su, the founder of Three Arrows Capital, left this tweet and then disappeared. At that time, Three Arrows was rumored to be in a liquidity crisis and insolvent, which caused market panic. Zhu Su's tweet undoubtedly verified some of the speculation.

The root cause of the collapse is that Three Arrows misjudged the situation and continued to go long on Bitcoin and other crypto assets through circular mortgage lending and leverage. As the market went down, huge margins and collateral were liquidated one after another, and the LUNA previously invested also lost hundreds of millions of dollars, which directly led to liquidity depletion, and then triggered a spiral decline in the market, with Bitcoin falling below $18,000 at its lowest. Odaily Planet Daily once wrote an article analyzing the collapse of Three Arrows, and recommended reading "Three Arrows Capital's Big Defeat: ETH's First Holder is in a Liquidity Crisis".

The market does not have a clear understanding of the specific scale of Sanjian’s debt. In particular, some creditors are afraid of causing panic runs among users and dare not take the initiative to disclose what they know, and even want to distance themselves from Sanjian.

Over the past month, as market sentiment stabilized and a series of events were gradually resolved, Three Arrows’ creditors have surfaced one after another: Voyager Digital, BlockFi, Deribit, Blockchain.com, Genesis, DeFiance Capital, TureFi, and several DeFi protocols invested by Three Arrows.

The company with the highest debt is the crypto broker Voyager Digital. The company lent 15,250 bitcoins and 350 million USDC unsecured loans to Three Arrows. If BTC is calculated at $20,000, the total value is about $655 million. On the day the news came out, Voyager Digital's stock price plummeted by more than 60%, and the cumulative decline has reached 86% so far.

Due to the depletion of cash flow, Voyager Digital reduced the daily withdrawal limit from $25,000 to $10,000 and limited the number of daily withdrawals. On the other hand, it sought short-term debt support from Alameda and obtained a revolving credit line of $200 million and 15,000 BTC, but it still failed to save the collapsing building. On July 6, Voyager Digital announced the suspension of all customer transactions, deposits and withdrawals, and loyalty rewards, and officially initiated the bankruptcy reorganization process and filed for bankruptcy protection. It plans to repay user assets through three arrows repayment, distribution of new stocks and platform remaining tokens.

But it remains unknown how much cryptocurrency customers will ultimately get back.

From being the most promising crypto-economist in North America to bankruptcy and liquidation, Voyager Digital's experience is quite sad. Another crypto-lending platform, BlockFi, is also facing the situation of being acquired at a low price due to the Three Arrows debt.

According to a leaked recording of a Morgan Creek investor conference call, BlockFi had provided a loan of approximately $1 billion to Three Arrows, with collateral of two-thirds Bitcoin and one-third GBTC, with an overcollateralization ratio of 30%; as the price of BTC fell, BlockFi liquidated Three Arrows' collateral, and the specific loss is unknown. After Three Arrows went bankrupt, BlockFi also actively sought external financing, but the latest valuations given by several parties were far lower than BlockFi's $5 billion valuation last year. In the end, BlockFi chose FTX US ($240 million acquisition option + $400 million revolving credit line), and plans 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 its loan to Three Arrows Capital. The company announced that it has sufficient liquidity and its customers are not affected.

Cryptocurrency market maker and lending company Genesis also lost more than $100 million, but its parent company Digital Currency Group (DCG) is financially strong and assumed part of the debt to ensure its continued operations.

Crypto derivatives platform Deribit made it clear that San Arrow, as a shareholder of its parent company, does have liabilities in a few accounts of the company, but this will not affect its operations. Deribit is financially healthy and is willing to bear the losses.

The reason why the trading institutions suffered losses was that when the market went down and fell below the liquidation line, these institutions did not immediately liquidate Sanjian’s margin, but instead gave it time to cover its positions (a common practice in the industry), but ultimately Sanjian defaulted, resulting in losses.

In addition, Three Arrows was also exposed for misappropriating customer funds. Danny, the trading director of 8 BlocksCapita, said that when he used a Three Arrows trading account to trade, Three Arrows took away about 1 million from the account.

According to anonymous source 3AnonCompany, San Arrows launched structured credit products with a yield of 10%-15% since its establishment in 2018. "Lenders include small trading platforms, individuals and companies. San Arrows always skillfully embezzles customers' money when trading with counterparties, just like using its own money." Some San Arrows investment projects will also return the investment funds to San Arrows for financial management, including Kyber Network, crypto savings application Finblox, etc., but the whereabouts of these funds are currently unknown.

Three Arrows’ other creditors include: institutional lending platform TureFi, which owes $2 million and was originally scheduled to be repaid in August; Web3 venture capital firm DeFiance Capital, whose specific debt is unknown; and Three Arrows Capital’s over-the-counter (OTC) arm TPS Capital, which also issued a statement saying it is one of Three Arrows Capital’s debtors.

According to Terra researcher FatMan, Three Arrows has a total debt of approximately $2 billion, current assets of approximately $400 million, and liabilities of $1.6 billion; an anonymous person 3AnonCompany tweeted that Three Arrows currently has a total outstanding debt of more than $2 billion, but only $200 million in liquid assets (due to poor liquidity, it is difficult to assess the actual repayable figure).

(2) Multiple lawsuits vs. bankruptcy protection

On June 24, Voyager Digital sent a default notice to Three Arrows Capital, but received no response, which cast a shadow on the creditors. Although many creditors have tried to liquidate Three Arrows assets at the first opportunity, they still failed to make up for the losses in time.

As Three Arrows’ debt gap grew, creditors could no longer sit still and began to sue in multiple places in an attempt to obtain priority compensation. DeFiance Capital said it was considering taking legal action against Three Arrows Capital, either in the form of arbitration, litigation or bankruptcy procedure amendments, to require Three Arrows Capital to repay as a creditor.

Blockchain.com and Deribit were the first to file a lawsuit in the British Virgin Islands (BVI) to liquidate all of Three Arrows Capital's assets. "We believe that Three Arrows Capital has defrauded the crypto industry and intend to hold them accountable to the fullest extent of the law. We have filed an application to immediately liquidate all of Three Arrows Capital's global assets." (Note: Three Arrows is headquartered in Singapore, but was registered in the British Virgin Islands and was sued based on the principle of territorial jurisdiction.)

On July 1, the BVI court ordered the liquidation of all Three Arrows assets on Monday and appointed global consulting firm Teneo Restructuring to manage 3AC's bankruptcy affairs - Teneo mainly focuses on protecting the assets of the liquidated company and determining who its creditors are. Teneo then appointed two partners, Russell Crumpler and Christopher Farmer, as joint liquidators and set up a website through which creditors can file claims against Three Arrows and related matters will be synchronized on the website.

At the same time, the Monetary Authority of Singapore (MAS), where Three Arrows is headquartered, also issued a warning to it 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 limit for registered fund management companies. Specifically, Three Arrows has transferred the management of its fund 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 and exceeded its allowed RFMC asset management scale of S$250 million. "MAS is assessing whether it has further violated MAS regulations."

MAS Announcement

To avoid jail time, Zhu Su teamed up with Advocatus Law LLP, a Singaporean law firm specializing in white-collar crime cases, led by Christopher, one of the firm’s founders .
（https://www.legal500.com/firms/34334-advocatus-law-llp/34824-singapore-singapore/lawyers/491439-christopher-anand-daniel/）as the lead lawyer for Three Arrows’ debt prosecution. Christopher, who has just taken office but has extensive experience, filed for bankruptcy in the New York court under Chapter 15 of the U.S. Bankruptcy Code (Chapter 15 for short) to protect Three Arrows’ assets in the United States.

It is important to emphasize that there are usually the following types of bankruptcy liquidations in the United States: Chapter 7, direct liquidation bankruptcy, the company will immediately enter the liquidation stage; Chapter 11, the company can negotiate with creditors about restructuring; and Chapter 15 applied for by Three Arrows is usually a secondary bankruptcy procedure against foreign individuals or entities. Luckin Coffee has used this trick before - the main bankruptcy process is carried out in the foreign company's home country (Three Arrows' headquarters in Singapore), and before the liquidation is completed, Three Arrows' assets in the United States cannot be obtained by other creditors.

The purpose of Three Arrows is obviously not hidden from the creditors. In order to prevent Three Arrows from transferring assets, the joint creditors filed a lawsuit with the Southern District Bankruptcy Court of New York, requesting the freezing of Three Arrows Capital's remaining assets in the United States. According to the documents submitted by the creditors, the two founders of Three Arrows did not cooperate with the liquidation process and refused to communicate during the conference call, leaving it to the lawyers to deal with. The creditors' lawyers who visited the Singapore office of Three Arrows Group found that the office had been abandoned. Zhu Su and Kyle Davies are missing, and they may try to transfer the company's assets to external accounts, which is a high risk.

To this end, the New York court held an emergency hearing for creditors. Neither of the two founders attended. Ultimately, the court granted creditors provisional relief to prevent Three Arrows from transferring and disposing of assets in the United States, and designated Teneo as the bankruptcy liquidator with the right to dispose of related assets (Note: According to "provisional relief", foreign representatives have the right to issue subpoenas to the founders of Three Arrows, requiring them to produce documents and testimony).

In response to the creditor's claim of "unknown whereabouts", Zhu Su fought back and posted two screenshots of emails between his attorney and the debt liquidator (Teneo) (https://twitter.com/zhusu/status/1546801270014758912):

The first email showed that Zhu Su "disappeared" because he and his family were "threatened with physical violence" and "had been under great pressure" when facing MAS inquiries, but the debt liquidator did not reflect this to the court;

The second email shows that the liquidator did not execute the agreed-upon StarkWare token warrant terms, which "caused [3AC] to lose considerable value." Three Arrows participated in StarkWare's $75 million Series B financing in March 2021. The warrant expired on July 5, and since the liquidator did not honor the StarkWare Token acquisition offer, there is now no Starkware Token.

Two emails posted by Zhu Su

The two sides have different opinions on who is right and who is wrong, and there is no conclusion yet. The latest news is that the first meeting of Three Arrows Capital creditors will be held on July 18. The meeting will be hosted by Teneo. The specific agenda of the meeting is still unclear, but the latest news will be synchronized on a dedicated website (https://3acliquidation.com/).

(3) What are the difficulties in liquidation?

Although the creditors have obtained support from courts in various places, the bankruptcy liquidation of Three Arrows is destined to fail to satisfy the creditors.

Unlike bankruptcy liquidation in the traditional financial world, crypto finance has its own special features, mainly in the recovery of on-chain assets.

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

The few assets that creditors can seize include:

One is GBTC assets. The current market price of GBTC is $13.13 per share, and the market fair value is $18.98, a discount of more than 30%; according to the announcement at the beginning of 2021, San Arrows holds more than 10% of GBTC shares, and the specific proportion is currently unknown. Once this part of the assets is liquidated to repay debts, it is bound to further suppress the price of GBTC.

The second is assets in exchanges or custodial accounts. According to the rights granted by the U.S. Bankruptcy Court, creditors can issue subpoenas to crypto trading platforms in the U.S., requiring them to cooperate in liquidation. However, considering that BitMex, Blockchain.com, FTX and other institutions have already liquidated most of the collateral of Three Arrows, the scale of this part of the remaining assets may not be very large, and the impact on the market is also relatively small.

The third is investment equity/tokens. Sanjian has previously invested in dozens of startups, and there are still some tokens that have not been unlocked in the contracts. In addition, there are equity in some projects that have not issued coins. These can all be used as liquidation assets, but the liquidity is not high. In addition, some investment institutions (such as TPS Capital) have issued documents to distance themselves from Sanjian, which has also increased the difficulty for creditors to collect payments.

In addition to crypto assets, Sanjian and Zhu Su’s personal physical assets cannot be ignored.

Singapore registration records (https://twitter.com/FatManTerra/status/1542814136886771712) show that Three Arrows Capital controls five high-end properties, including three GCBs (Good Class Bungalows), a shophouse and a townhouse. Other assets include a fleet of high-end cars and a yacht (Note: GCB is Singapore's top private residential real estate category, with only about 2,800 in the whole of Singapore).

Zhu Su's house in Singapore

Among them, Zhu Su's daughter has a property worth $48.8 million, which is held by a trust fund, his wife has a new house under construction (worth $28.5 million), and the yacht was purchased last year for $50 million, which was only a down payment. Researcher FatMan (https://twitter.com/FatManTerra/status/1542490257186226180) tweeted that a source confirmed that Zhu Su was urgently trying to sell the mansion under his daughter's name. He asked for the funds to be transferred to a bank account in Dubai and did not intend to use the proceeds from the sale to repay creditors.

The other physical assets under Zhu Su's name are currently unknown, and creditors need to initiate lawsuits in courts around the world for investigation. Currently, Teneo has moved to East Asia and applied to the Singapore High Court for interim 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) Conclusion

In just two months, Three Arrows Capital went from being a top industry fund that managed tens of billions of assets and had a powerful influence to a defendant with billions of debts and a target of public condemnation. It makes people sigh: the former tycoons were actually a false image built up by high leverage and circular borrowing.

The collapse of Three Arrows is by no means an isolated case. A number of centralized crypto institutions have exposed their long-standing drawbacks during this crisis: repeated use of leverage, unsecured credit loans, multi-angle debt, misappropriation of user assets, and all kinds of opaque and illegal operations.

The frequent occurrence of such cases will inevitably accelerate the regulation and review of cryptocurrencies. Today, the consequences of this round of violent reshuffles have gradually materialized in the market and are nearing their end. The market has stabilized in recent days, and we are also looking forward to the rebirth of the crypto financial market.