Three Arrows Capital collapse: a crypto fund that spread losses to lenders

What was Three Arrows Capital before its collapse?

Three Arrows Capital, often shortened to 3AC, was a Singapore-based crypto hedge fund founded in 2012 by Kyle Davies and Su Zhu. A hedge fund invests money from clients and from borrowed funds, and it aims for returns in both rising and falling markets.

Borrowing is the key word. A fund that borrows from lenders magnifies gains and losses alike. When prices rise, the lenders receive interest and the fund keeps the surplus. When prices fall, the fund must repay with money that it no longer has.

Which positions put Three Arrows Capital under pressure in 2022?

2 positions stand out in the record. The fund invested about $200 million in LUNA in February 2022, and LUNA collapsed to near zero in May 2022. It also owned almost 39 million units of the Grayscale GBTC trust at the end of 2020, according to a January 2021 SEC filing.

On 17 June 2022, GBTC units traded at a 34% discount to the trust’s net asset value. A position that trades below its stated value is hard to sell without a loss. Both positions weakened at the time the fund needed to repay its lenders.

When did a court order the Three Arrows Capital liquidation?

On 27 June 2022, a British Virgin Islands court ordered the fund liquidated. Russell Crumpler and Christopher Farmer of Teneo were named joint liquidators. On 2 July 2022 the firm also filed for Chapter 15 bankruptcy, a US procedure that protects assets located in the United States while a foreign case runs.

Liquidation means that an appointed professional takes control of the assets, sells them and shares the proceeds among creditors. The fund’s founders no longer decide what happens to the assets, and the liquidators report to the court. Creditors then wait for the liquidators to value, sell and distribute, a process that can take years.

What did the Singapore regulator say about Three Arrows Capital?

On 30 June 2022, the Monetary Authority of Singapore reprimanded the fund. It cited 3 points: exceeding the S$250 million limit on assets under management, providing false or misleading information, and failing to notify changes to directorships or shareholdings.

A reprimand is a public statement of rule breaches, not a court verdict on the collapse. For a reader, the case shows why regulators in financial centres track limits and disclosures. A fund that crosses a limit or omits a notice gives a signal that an outside party can check.

How did the Three Arrows Capital collapse reach crypto lenders?

Voyager reported in June 2022 that the fund had not repaid loans totaling $666 million, and Voyager suspended withdrawals on 1 July 2022. Genesis incurred substantial losses from loans to the fund, and its parent, Digital Currency Group, assumed certain related liabilities.

This is the transmission chain. The fund borrowed from lenders, a market fall left it unable to repay, and the lenders then had less to return to their own customers. A customer who never heard of the fund became exposed to it through a platform, and a reader can measure that indirect exposure by asking which funds a platform lends to.

Why did a GBTC discount matter to the Three Arrows Capital fund?

GBTC is a trust that holds bitcoin on behalf of its unit holders, and its units trade on a market. The net asset value is the worth of the bitcoin the trust holds. When the units trade at a 34% discount, as on 17 June 2022, a holder who sells receives about 66% of the underlying value.

For a borrower, a discount weakens collateral. A lender who accepts such units as security sees the security lose value even when bitcoin itself is stable. The fund held almost 39 million units at the end of 2020, so a discount reached a large position.

How large were the creditor claims against Three Arrows Capital?

July 2022 bankruptcy filings showed about $3.5 billion in creditor claims. The liquidators’ figures cite $3.4 billion from 154 creditors, so sources differ slightly on the total. The difference is normal in early insolvency work, because claims are filed, checked and adjusted over time.

When you quote the total, say which document you use and its date. The range of $3.4 billion to $3.5 billion shows the scale: a single fund created claims comparable to the largest failures of 2022.

What does the Three Arrows Capital collapse teach about leverage?

Leverage links the balance sheets of lenders and borrowers. Concentrated positions, a token that fell almost to zero and an asset trading at a discount all lowered the fund’s ability to repay, and lenders had little visibility into the whole picture.

A lender that checks a borrower’s total debts, not only its own loan, holds better information. The same holds for a customer who reads how a platform lends: the question is who the borrowers are and how much they owe elsewhere.

What can a reader check about a crypto fund or its lenders?

4 checks apply. Ask whether the platform lends to funds and which ones. Ask how large the biggest borrower is compared with the platform’s capital. Ask for the regulator that supervises the borrower. Ask what collateral backs each loan and how the platform values it.

The EQOS Asia method page shows how such checks feed a structured score, and the contact page lets you bring a counterparty question from your own treasury.

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About the author

Stéphane Jambu

President, EQOS Forecast Asia

Stéphane Jambu leads EQOS Forecast Asia and works as a consultant in e-commerce, search visibility, and AI. LinkedIn profile