The Unraveling of Three Arrows Capital: A Deeper Dive into FTX’s Role
In a startling revelation that has sent ripples through the cryptocurrency community, court documents have disclosed that FTX, the now-defunct exchange, liquidated a staggering $1.53 billion in assets belonging to the crypto hedge fund Three Arrows Capital (3AC) just weeks before its collapse in 2022. This new evidence challenges the earlier belief that 3AC’s downfall was purely due to market dynamics.
Background of the Collapse
Previously valued at over $10 billion, 3AC faced a dramatic downturn in mid-2022 following a series of high-risk trades that did not pan out as expected. The hedge fund, which had significant borrowings from more than 20 large institutions, was severely impacted by the crypto market crash in May 2022, which saw Bitcoin’s value plummet to $16,000.
However, the recent findings suggest that there were other significant factors at play. According to a spokesperson from FTX Creditor, a group representing FTX creditors and bankruptcy claim buyers, 3AC has petitioned a bankruptcy court to increase its claim against FTX from $120 million to a massive $1.53 billion. This adjustment comes after 3AC uncovered evidence of FTX’s liquidation of their assets, which was previously unknown due to FTX’s own bankruptcy proceedings.
Legal Developments and Asset Freezing
In a significant legal development on December 21, 2023, a court in the British Virgin Islands ordered the freezing of $1.14 billion worth of assets owned by 3AC co-founders Kyle Davies and Su Zhu. Despite these measures, Teneo, the firm overseeing 3AC’s liquidation, estimates that creditors are still owed around $3.3 billion.
Davies has responded to claims from Teneo about non-cooperation, stating that these allegations are overstated. This ongoing legal battle highlights the complexities and challenges in untangling the financial and operational conduct of 3AC leading up to its collapse.
Insights from Industry Experts
Nicolai Sondergaard, a research analyst at Nansen, commented on the situation, noting that even an additional $1.5 billion might not have been sufficient to meet the creditor claims against 3AC. “From what I can see, even if they in 2022 had the additional $1.5 billion they still would not have been able to meet creditor claims/debt repayments,” Sondergaard explained.
He further added that while 3AC could pursue a larger claim, the actual amount they might recover remains uncertain. This situation underscores the precarious nature of financial management within some sectors of the cryptocurrency industry.
Broader Market Implications
The collapse of 3AC occurred in a context marked by broader market turbulence, including the downfall of Terraform Labs and the subsequent depegging of its Terra (LUNC) and TerraClassicUSD (USTC) tokens. This period also saw other crypto entities like Celsius facing severe liquidity crises.
Changpeng Zhao, Binance co-founder and former CEO, referred to these developments as an “interesting turn of events,” and speculated on the potential connections between these market events and FTX’s activities.
The unfolding saga of 3AC and FTX not only highlights the interconnectedness of major players in the crypto market but also serves as a cautionary tale about the risks associated with high leverage and concentrated exposure to volatile assets. As the legal proceedings continue, the cryptocurrency community watches closely, hoping for more transparency and stability in the ecosystem.
For further insights into the challenges and strategies in navigating cryptocurrency investments, consider exploring Navigating the Legal Maze of Crypto Recruitment Post-FTX Collapse.
