Crypto Fund Three Arrows Capital Facing Potential Insolvency: Report

Recent on-chain data has triggered speculation that crypto trading and venture capital firm Three Arrows Capital (3AC) may be the latest prominent industry name to crumble.

Those indications were further fueled by a tweet on Tuesday from 3AC’s cofounder Zhu Su, who seemed to confirm a period of stress but didn’t drop specific details.

After what appears to be a $400-million liquidation by top-tier lenders, 3AC may now be facing insolvency, The Block reported on June 15, citing sources familiar. Since its liquidation, 3AC is said to have maintained limited contact with counterparties.

The firm, which counts BlockFi and Deribit among its investments, is exploring how it can reclaim its position with lenders and other parties, the report added.

3AC didn’t immediately respond to a request for comment by Blockworks.

In traditional finance, liquidations happen when companies attempt to cover debts by selling some assets at a loss. In decentralized finance, a fund or protocol would sell crypto assets to cover its debt.

Founded in 2012 by classmates Zhu Su and Kyle Davies, 3AC is a well-known crypto hedge fund that has invested in multiple GameFi and DeFi projects. At market peak, it reportedly managed about $10 billion. In April, the fund pledged to move its headquarters from Singapore to Dubai. 

Three Arrows Capital takes haircut to pay back Aave loans

Due to its substantial investment in Terra, 3AC had already faced a major setback with the stablecoin’s collapse. 3AC also drew attention on social media after it began dumping its staked ether (stETH), which is down nearly 40% in the last week alone. 

The stETH token is meant to be redeemable for one ETH after Ethereum completes its transition to proof of stake. Due to current market volatility, stETH has fallen up to 7% below par with ETH, causing issues for some of its largest holders such as 3AC, as well as embattled crypto lender Celsius.

Notably, 3AC began withdrawing stETH from decentralized platforms in May during TerraUSD’s crash. More recently, the firm on Tuesday withdrew more than 81,000 stETH from interest-bearing DeFi protocol Aave – worth around $92 million at the time. 

Shortly after, 3AC traded 38,900 stETH for 36,718 ETH (then worth $43.9 million) via decentralized exchange 0x, representing a 6% haircut on what should’ve been close to a one-to-one trade. 3AC then returned the ETH to Aave, as it was on loan.

In May, crypto bull Zhu said on Twitter that his supercycle price thesis was “regrettably wrong.” That thesis was laid out in an interview from February, when he suggested bitcoin could hit $2.5 million if it manages to capture a significant chunk of gold’s market share.

Along with stocks and other asset classes, the total market value of cryptocurrencies has fallen to $863 billion, according to Blockworks Research, down from $3 trillion in November.

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