What is Three Arrows Capital?
Three Arrows Capital (3AC) is a Singaporean cryptocurrency hedge fund founded in 2012 by Kyle Davies and Su Zhu.
Learn more in our latest video: How did Three Arrows Capital (3AC) Fall from the Top?
The rise of Three Arrows Capital
At its peak, they backed successful and hugely popular cryptocurrency projects such as Aave, Ethereum, Polkadot, Solana, and WOO Network, among others. The Fund reportedly had a net asset value of US$18 million according to their last public statement.
Founders Kyle Davies and Shu Zu were also famous in the cryptocurrency space, with 49k and over 550k Twitter followers respectively.
The fall of Three Arrows Capital
The fall of Three Arrows Capital can be largely attributed to 3 factors: the Axie Infinity hack, the collapse of Terra (LUNA, UST) and failure to meet margin calls.
Axie Infinity hack
Axie Infinity was a “play to earn” blockchain game which at its peak had millions of players worldwide. However, declining popularity and becoming the victim of a US$700m hack in March 2022 caused a huge and seemingly irrevocable blow to the game.
Collapse of Terra (LUNA, LUNC, UST, USTC)
In 2018, Terra was founded by Do Kwon and Daniel Shin. Terra is an open-source blockchain that hosts decentralized applications (dApps) and developer tools. Terra has a native token- $LUNA (now Terra Luna Classic $LUNC), which is used for governance and mining. LUNA has to be burned to mint UST (now Terra Classic USD $USTC) at a ratio of 1:1. This was the only way to obtain UST and take advantage of the various interest rates through staking on the Terra ecosystem. This meant that LUNA was an algorithmic stablecoin i.e. a stablecoin that can only maintain its peg via software and rules.
The risk of these algorithmic stablecoins and why so far they have all failed is because of the “death spiral”. This is a series of events that inevitably led to the demise of a protocol. On 7th May 2022, over US$2 billion worth of UST was unstaked and hundreds of millions worth sold. This huge sale caused prices of UST to fall to 91 cent (i.e. it was no longer maintaining its peg). This caused huge panic in the market with UST holders frantically selling their UST to mitigate their losses, which pushed UST prices further down. A week later on 13th May 2022, prices of UST had already fallen to US$0.01.
Three Arrows Capital was unfortunately caught up in Terra’s collapse since it was heavily invested in LUNA. According to a Twitter post from a whistleblower known as FatMan, Three Arrows Capital purchased 10.9 million locked LUNA for US$559.6 million. However, since the collapse, this LUNA was only worth US$670.45.
In a recent development, a court in Seoul, South Korea issued an arrest warrant against Do Kwon and 5 others who are all currently in Singapore. The 6 persons are accused of violating South Korea’s capital markets law.
Failure to meet margin calls
As a result of suffering losses from the Axie Infinity hack, the Terra collapse, and the crypto market downturn, Three Arrows was unable to meet margin calls from its various lenders. According to the Financial Times, some of these lenders included US-based crypto lender BlockFi, which Three Arrows Capital had borrowed Bitcoin from and was now unable to repay.
Cryptocurrency options and futures exchange Deribit was also chasing down Su Zhu and Kyle Davies as they both kept a low profile since the collapse of Three Arrows Capital. Uncovered messages from Deribit Exchange’s representatives reveal that they have been trying to contact Su Zhu and Kyle Davies in vain. The messages also reveal that Deribit had sold US$85 million worth of BTC and ETH in an attempt to reduce Three Arrows’ position. Deribit also suggested that Three Arrows use their 32 million USDC as collateral.
Three Arrows Capital liquidation
Three Arrows Capital filed for Chapter 15 bankruptcy on 1st July 2022 in New York. The purpose of a chapter 15 bankruptcy is to prevent creditors from seizing a company’s assets located in the US. Meanwhile, liquidation proceedings will continue in the British Virgin Islands where Three Arrows is based.
According to court documents, Three Arrows Capital owed US$3.5 billion to 27 different companies including Voyager Digital. Voyager Digital is a publicly listed crypto brokerage firm that suspended trading and withdrawals shortly before the news of 3AC’s bankruptcy. Other sizable creditors included Genesis Global Trading, which had lent US$2.36 billion to Three Arrows Capital.
Court documents also gave insights as to the remaining assets owned by Three Arrows Capital. These consist of cryptocurrencies such as Bitcoin, Avalanche, and Near, as well as shares of Grayscale Bitcoin Trust and in Deribit. In total, these remaining assets are worth at least US$2.8 billion. In particular, the court document estimated the Deribit shares to be worth around US$500 million. However, as reported by CoinTelegraph, there are anonymous sources that claim the value of the Deribit shares is in fact only around $25 million. The consequence of this is it is possible there will not be sufficient assets to repay all of Three Arrows Capital’s creditors.
Su Zhu and Kyle Davies sues Three Arrows Capital.
Both Su Zhu and Kyle Davies’ whereabouts are currently unknown. Previously, the court issued an order allowing Three Arrows Capital liquidators to demand the pair attend court. It was also revealed that Zhu and Davies were uncooperative with their liquidators. According to a legal document filed by Three Arrows Capital’s liquidators, there were Zoom calls with a “Su Zhu” and “Kyle”. However, it could not be confirmed that it was indeed them because their video was switched off. Also, their audio was muted with neither of them speaking despite being asked questions.
However, it appears that whilst Su Zhu was filing a claim for US$5 million against Three Arrows Capital- his own fund. Kyle Davies also filed an affidavit stating that his wife, Kelli Chen also lent US$65.7 million to Three Arrows Capital.
Su Zhu and Kyle Davies buy a yacht with borrowed funds?
According to a legal document filed by the liquidators of Three Arrows Capital, Su Zhu and Kyle Davies made a down payment on a US$50 million yacht. The founders had boasted that the yacht would be larger than any owned even by Singapore’s richest billionaires. It is speculated that the yacht was purchased with borrowed funds.
Three Arrows Capital CEO Su Zhu to sell US$34.8mil bungalow after liquidation
CEO of Three Arrows Capital Su Zhu is apparently urgently trying to sell the US$34.8mil bungalow in Singapore after 3AC filed for bankruptcy. The 31,854 sq ft bungalow was purchased in December 2021 and was held on trust for his 6-year-old son. According to text messages circulating among property agents, the bungalow is being put up for “very urgent sale”
Zhu and his wife own 3 properties between them including the bungalow which they are planning to sell, spending over US$59.5 million.