Three Arrows Capital has filed for bankruptcy in the US, highlighting the scale and reach of the prominent crypto investment firm’s borrowings across the industry before it collapsed into liquidation this week.
The Chapter 15 bankruptcy filing in Manhattan federal court late on Friday came just days after Three Arrows was pushed into liquidation in the British Virgin Islands, following claims that it failed to pay $80mn it owed to digital asset exchange Deribit. The US bankruptcy petition was made to empower attorneys appointed to lead the unwinding of Three Arrows in the British Virgin Islands, the Singapore-based fund’s legal domicile, to shield its US assets.
The failure of Three Arrows, which used borrowing to turbocharge its bets on cryptocurrencies, is the latest sign of how this year’s turmoil in digital asset markets has severely wrongfooted some of the industry’s biggest players. It also highlights how trouble at one firm can ricochet across the sector due to opaque links between investors, crypto exchanges and lending firms.
Insolvency specialists at Teneo, the advisory firm appointed in the British Virgin Islands to liquidate Three Arrows, told the US court that a “significant number of creditors” are expected to make claims against the hedge fund.
Deribit, a derivatives focused crypto trading platform, had kicked off the liquidation proceedings in the British Virgin Islands last week, with Three Arrows later agreeing to place itself into liquidation. However, Three Arrows is also in arbitration in New York with one of its biggest creditors, Russell Crumpler, one of the firm’s liquidators, said in a US court filing.
“With many creditors seeking to enforce their rights to collect on the debtor’s outstanding debt obligations, the risk increased that the debtor would dissipate it assets without consideration of each individual lender’s ability to recoup its losses,” Crumpler said.
In a sign of the scale of Three Arrows’s borrowings, Toronto-listed crypto lender Voyager Digital said in late June that it could lose more than $650mn in loans it made to the crypto investment firm co-founded by Su Zhu and Kyle Davies. Voyager late on Friday said it was suspending withdrawals and trading on its platform as it explores “strategic alternatives”. It added that it is “actively pursuing all available remedies for recovery from Three Arrows”.
BlockFi, another big crypto lender, said on Friday it had sustained around $80mn in losses due to the Three Arrows collapse even after it unwound some of its positions. BlockFi on Friday also announced a deal in which FTX will provide it fresh financing in return for an option that allows the crypto exchange to buy the group for up to $240mn.
Three Arrows is also facing regulatory scrutiny in Singapore. The Monetary Authority of Singapore reprimanded the group this week for providing false information and breaching an asset under management threshold. Authorities in the city-state said they had been investigating Three Arrows for a year. The fund was first managed in Singapore before shifting its domicile to the British Virgin Islands in September.
Three Arrows rose to prominence during the height of the crypto bull market that peaked in November 2021. Zhu pitched a “supercycle” thesis in which increasing mainstream adoption meant prices would continue to rise without falling back into a near-term bear market. However, as investors have raced away from speculative assets this year, the crypto market has come under intense pressure. The market value of the leading 500 crypto tokens has collapsed from a high last November of $3.2tn to under $1tn.
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 fully committed to working this out.”