Three Arrows Capital has filed for bankruptcy in the US, highlighting the scale and scope of the industry-leading crypto investment firm’s borrowing before it collapsed into liquidation this week.
The Chapter 15 bankruptcy filing in Manhattan federal court on Friday night came just days after Three Arrows went into liquidation in the British Virgin Islands, following allegations that it failed to pay the $80 million he owed digital asset exchange Deribit. The U.S. bankruptcy petition was filed to empower attorneys appointed to lead the breakup of Three Arrows in the British Virgin Islands, the legal domicile of the Singapore-based fund, to protect its U.S. assets.
The failure of Three Arrows, which used borrowing to boost its cryptocurrency bets, is the latest sign of how this year’s turmoil in digital asset markets has seriously misled some of the biggest players in the industry. It also highlights how one company’s problems can ricochet across the industry due to opaque ties between investors, crypto exchanges, and lending companies.
Insolvency specialists at Teneo, the consultancy appointed in the British Virgin Islands to liquidate Three Arrows, told the US court that a “significant number of creditors” would have to make claims against the hedge fund.
Deribit, a derivatives-focused crypto-trading platform, had launched 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 in New York with one of its biggest creditors, Russell Crumpler, one of the company’s liquidators, said in a US court filing.
“With many creditors seeking to enforce their rights to collect the debtor’s unpaid debts, the increased risk that the debtor would dissipate its assets without regard to each lender’s ability to recoup its losses,” Crumpler said.
In a sign of the scale 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 made to the investment firm in crypto co-founded by Su Zhu and Kyle Davies. On Friday evening, Voyager announced that it was suspending withdrawals and trading on its platform as it explored “strategic alternatives”. He added that he was “actively pursuing all available remedies to recover from Three Arrows”.
BlockFi, another major crypto lender, said on Friday that it suffered losses of around $80 million due to the collapse of Three Arrows, even after unwinding some of its positions. BlockFi also announced a deal on Friday in which FTX will provide it with new funding in exchange for an option for the crypto exchange to buy the group for up to $240 million.
Three Arrows is also under regulatory scrutiny in Singapore. The Monetary Authority of Singapore reprimanded the group this week for providing false information and crossing an assets under management threshold. City-state authorities said they had been investigating Three Arrows for a year. The fund was first managed in Singapore before moving to the British Virgin Islands in September.
Three Arrows rose to prominence during the peak of the crypto bull market that peaked in November 2021. Zhu presented a “supercycle” thesis in which growing mainstream adoption meant prices would continue to rise. increase without falling back into a short-term bear market. However, as investors have moved away from speculative assets this year, the crypto market has come under intense pressure. The market value of the top 500 crypto tokens collapsed from a high of $3.2 billion last November to less than $1 billion.
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 fully committed to resolving this issue.”