Saturday, July 23, 2022

Three Arrows Capital Founders Break Their Silence, Look to Move to Dubai: Report

Oliver Knight

Fri, July 22, 2022 

The founders of insolvent crypto hedge fund Three Arrows Capital (3AC), Su Zhu and Kyle Davies, have broken their silence in an interview with Bloomberg.

  • The duo described the collapse as "regrettable," but denied claims that they pulled money from the fund before its collapse, according to the report.

  • The collapse of 3AC, seemingly triggered by the fall of the Terra ecosystem, sent ripples in the crypto market. Investors are claiming that the defunct fund still owes them $2.8 billion. On Monday, a 1,157-page court filing revealed the extent of the hedge fund's debt following the implosion, with individual claims worth over $1 billion.

  • The founders declined to say where they were, but one of the lawyers on the call said their ultimate destination is the United Arab Emirates (UAE), the report added.

  • “Given that we had planned to move the business to Dubai, we have to go there soon to assess whether we move there as originally planned or if the future holds something different for us,” Zhu added.

  • In the report, Zhu said that the reason for the fund's collapse was placing leveraged trades with hope that the crypto market would rebound to the upside. He compared 3AC's implosion to that of Celsius, a crypto lending firm that froze withdrawals and filed for bankruptcy after it failed to keep enough liquidity to honor customer redemptions.

  • One of 3AC's largest positions that went sour was in the Terra ecosystem and its token LUNA, all of which effectively collapsed to zero in May. The pair insists that they are cooperating with authorities while trying to keep a low profile.

  • “For Kyle and I, there’s so many crazy people in crypto that kind of made death threats or all this kind of noise,” Zhu said. “We feel that it’s just the interest for everyone if we can be physically secured and keep a low profile.”

  • Three Arrows Capital did not immediately respond to CoinDesk's request for a comment.

Read moreGenesis Files $1.2B Claim Against Three Arrows Capital

3AC cofounders resurface after five weeks, deny allegations

Monika Ghosh  

Fri, July 22, 2022 

Three Arrows Capital (3AC) cofounders Su Zhu and Kyle Davies denied allegations by 3AC liquidators that they moved money out of the crypto hedge fund before its collapse.

See related article: 3AC founders moved money out of troubled hedge fund, allege liquidators

Fast facts

  • Zhu and Davies claimed that they were forced into hiding due to death threats, but they have been “communicating with all relevant authorities,” contradicting the liquidators’ claims of non-cooperation, according to an interview given to Bloomberg.

  • The cofounders, who are reportedly relocating to the United Arab Emirates from Singapore, said they suffered extensive losses from the “regrettable” collapse of 3AC.

  • Zhu said: “We positioned ourselves for a kind of market that didn’t end up happening,” attributing the cause of the collapse to their optimism fueled by a multi-year bull market.

  • Zhu acknowledged heavy losses with the collapse of Luna and said that the cofounders’ personal relationship with Terra founder Do Kwon may have blinded them to Terra’s vulnerabilities.

  • 3AC also suffered deep losses when Grayscale Bitcoin Trust shares started trading at a discount to the price of Bitcoin.

  • In court filings, 3AC liquidators alleged that Zhu and Davies made a down payment on a yacht while the fund was going down, but Zhu said the yacht was bought over a year ago and had “a full money trail,” rejecting allegations of living a luxurious life.

See related article: Three Arrows Capital files for Chapter 15 bankruptcy

Three Arrows Founders Break Silence Over Collapse of Crypto Hedge Fund

Joanna Ossinger, Muyao Shen and Yueqi Yang


Fri, July 22, 2022 






(Bloomberg) -- After five weeks in hiding, the disgraced founders of Three Arrows Capital spoke extensively about the spectacular implosion of their once high-flying hedge fund, saying their bungled crypto speculation unleashed cascading margin calls on loans that should never have been made.

Su Zhu and Kyle Davies, both 35, first became friends in high school. They built 3AC into a crypto-trading behemoth before its collapse bankrupted creditors and exacerbated a selloff that foisted steep losses on mom-and-pop owners of Bitcoin and other tokens. At times contrite and at times defensive, Davies and Zhu, speaking from an undisclosed location, described a systemic failure of risk management in which easy-flowing credit worsened the impact of wrong-way bets.

They acknowledged the collapse triggered widespread pain, but mostly talked around questions about the effect on others in the industry. Instead, they stressed they suffered deep losses while denying allegations they pulled money out of 3AC before it all blew up. “People may call us stupid. They may call us stupid or delusional. And, I’ll accept that. Maybe,” Zhu said. “But they’re gonna, you know, say that I absconded funds during the last period, where I actually put more of my personal money back in. That’s not true.”

Advisers in charge of liquidating the fund said in July 8 filings that Zhu and Davies hadn’t cooperated with them and that the founders’ whereabouts were unknown. Zhu said death threats had forced them into hiding. “That does not mean that we haven’t been communicating with all relevant authorities,” said Zhu in the telephone interview with Davies and two lawyers from Solitaire LLP. “We have been communicating with them from day one.”

The two declined to say where they were but one of the lawyers on the call said their ultimate destination is the United Arab Emirates, which has emerged as a hot spot for crypto.

In a wide-ranging interview, the former Credit Suisse traders detailed the events leading to their fund’s implosion, which itself set off a chain reaction that has cost institutions and small-time speculators billions of dollars.

“The whole situation is regrettable,” Davies said. “Many people lost a lot of money.”

Leveraged Bets Meet Crypto Winter

Creditors of the fund, recently registered in the British Virgin Islands, filed paperwork saying they’re owed more than $2.8 billion in unsecured claims. That figure is expected to rise significantly, court papers show. To date, liquidators overseeing the insolvency have gained control of assets worth at least $40 million.

Read more: Three Arrows Creditors Include Crypto Giants, Co-Founder’s Wife

Zhu and Davies, long among the most vociferous crypto bulls in an industry known for extremes, put on trades – turbocharged by leverage – that put 3AC at the center of a series of implosions that convulsed the crypto market as prices retreated this year from their highs last fall. “We positioned ourselves for a kind of market that didn’t end up happening,” Zhu said.

“We believed in everything to the fullest,” added Davies. “We had all of our, almost all of our assets in there. And then in the good times we did the best. And then in the bad times we lost the most.”

At the same time, they claim, they weren’t outliers. They describe a confluence of interrelated one-way bets and accommodative borrowing arrangements that all blew up at once, leading not just to their fund’s demise but to bankruptcy, distress and bailouts at firms like Celsius Network, Voyager Digital and BlockFi.

Read more: The Collapse of Three Arrows Capital Became a Crypto Contagion

“It’s not a surprise that Celsius, ourselves, these kind of firms, all have problems at the same time,” Zhu said. “We have our own capital, we have our own balance sheet, but then we also take in deposits from these lenders and then we generate yield on them. So if we’re in the business of taking in deposits and then generating yield, then that, you know, means we end up doing similar trades.”

Efforts by Zhu and Davies to deflect blame are a sharp contrast to the pair’s previously relentless campaign of cheer-leading cryptoassets and belittling critics. Nerves were raked anew this week by creditor claims that the founders put a down payment on a $50 million yacht before the fund went under, a claim Zhu said is part of a smear campaign.

The boat “was bought over a year ago and commissioned to be built and to be used in Europe,” Zhu said, adding the yacht “has a full money trail.” He rejected the perception that he enjoyed an extravagant lifestyle, noting that he biked to work and back every day and that his family “only has two homes in Singapore.”

“We were never seen in any clubs spending lots of money. We were never seen, you know, kind of driving Ferraris and Lamborghinis around,” Zhu said. “This kind of smearing of us, I feel, is just from a classic playbook of, you know, when this stuff happens, when funds blow up, then you know, these are kind of the headlines that people like to play.”

The Long Arm of Luna

Davies and Zhu acknowledged heavy losses related to trades in Luna and the now-defunct algorithmic stablecoin TerraUSD, saying they were caught by surprise at the speed of the collapse of these tokens.

“What we failed to realize was that Luna was capable of falling to effective zero in a matter of days and that this would catalyze a credit squeeze across the industry that would put significant pressure on all of our illiquid positions,” Zhu said.

In retrospect, Zhu said, the firm may have been too close to Terra’s founder, Do Kwon.

“We began to know Do Kwon on a personal basis as he moved to Singapore. And we just felt like the project was going to do very big things, and had already done very big things,” he said in describing the firm’s miscalculations. “If we could have seen that, you know, that this was now like, potentially like attackable in some ways, and that it had grown too, you know, too big, too fast.”

“It was very much like a LTCM moment for us, like a Long Term Capital moment,” Zhu said. “We had different types of trades that we all thought were good, and other people also had these trades,” Zhu said. “And then they kind of all got super marked down, super fast.”

Read more: ‘Everything Broke’: Terra Goes From DeFi Darling to Death Spiral

One of those trades involved an Ethereum-linked token called staked ETH, or stETH -- designed to be a tradable proxy for Ether and widely used in decentralized finance. While every stETH is meant to be redeemable for one Ether once long-awaited upgrades of the Ethereum blockchain take effect, the turmoil sparked by Terra’s collapse caused its market value to fall below that level. This, in turn -- in Zhu’s telling -- caused other investors to put on trades that could benefit from the widening gap.

“Because Luna just happened, it, it was very much a contagion where people were like, OK, are there people who are also leveraged long staked Ether versus Ether who will get liquidated as the market goes down?” Zhu said. “So the whole industry kind of effectively hunted these positions, thinking that, you know, that because it could be hunted essentially.”

Read more: Flows of Ether Offshoot Reveal Terra’s Ripple Effect on Crypto

Still, the fund was able to continue borrowing from large digital-asset lenders and wealthy investors -- until, that is, they blew themselves up.

After Luna’s implosion, Zhu said lenders were “comfortable” with 3AC’s financial situation, and that they allowed them to keep trading as “as if nothing was wrong.” As courts filings have now revealed, many of these loans had required only a very small amount of collateral.

“So I just think that, you know, throughout that period, we continued to do business as usual. But then yeah, after that day, when, you know, Bitcoin went from $30,000 to $20,000, you know, that, that was extremely painful for us. And that was in, that ended up being kind of the nail in the coffin.”

Zhu said that “if we were more on our game, we would’ve seen that the credit market itself can be a cycle and that, you know, we may not be able to access additional credit at the time that we need it. If, if it kind of, you know, it hits the fan.”

Locked in to GBTC

Another bullish trade that came back to bite 3AC was through the Grayscale Bitcoin Trust, or GBTC. The closed-end fund allows people who can’t or don’t want to hold Bitcoin directly to instead buy shares in a fund that invests in them. For a while, GBTC was one of the few US-regulated crypto products, so it had the market to itself. It was so popular that its shares traded at a persistent premium to the value of the Bitcoin it held on the secondary market.

Grayscale allowed big investors like 3AC to purchase shares directly by giving Bitcoin to the trust. These GBTC holders could then sell the shares to the secondary market. That premium meant any sales could net an attractive profit for the big investors. At the time of its last filing at the end of 2020, 3AC’s was the largest holder of GBTC, with a position then worth $1 billion.

The strategy had a snag, though: The shares bought directly from Grayscale were locked up for six months at a time. And starting in early 2021, that restriction became a problem. GBTC’s price slipped from a premium into a discount—a share was worth less than the Bitcoin backing it—as it faced stiffer competition from similar products. As the months went on, the discount got wider and wider and the so-called GBTC arbitrage trade no longer worked – especially hurting investors that used leverage to try to enhance returns.

In Zhu and Davies’ telling, it was partly their own success that helped propel both GBTC and the herd mentality around the trade.

“We managed to do it at the right window when it was a very big profit,” Zhu said. “And then like others copied us into that trade later on and then lost not just the money, but also went into negative. Because everyone did it, then the trust went to discount and then it went to a far bigger discount than anyone thought possible.”

No Risk-Free Returns


In response to questions about what went wrong at the firm, Zhu cited overconfidence born of a multiyear bull market that infused not just him and Davies but nearly all of the industry’s credit infrastructure, where lenders saw their values swell by virtue of financing firms like his.

“There was always an understanding of what they were getting themselves into -- this was a risky firm,” Zhu said. “For us, if you go to our website, we’ve always had massive disclaimers about crypto risk. We’ve never once pitched ourselves as risk-free, like a simple yield.”

When crypto markets first started buckling in May, “we met all margin calls,” he said. “And, and so people understood that there was a risk involved.”

Moreover, lenders to the firm “benefited immensely when we were doing well, because as we were doing well, they could say, look, I make $200 million a year from Three Arrows’ financing business, give me a 10x multiple on that,” he said. “And now my own company’s worth $2 billion more. All these kinds of things. And so, like the risk departments were very relaxed about like the kind of risks that we were taking.”

So where from here? For now, the two co-founders are now transiting into Dubai. Zhu’s main hope is to get a calm, and orderly liquidation for their complex book of private assets.

“For Kyle and I, there’s so many crazy people in crypto that kind of made death threats or all this kind of noise,” Zhu said. “We feel that it’s just the interest for everyone if we can be physically secured and keep a low profile.”

“Given that we had planned to move the business to Dubai, we have to go there soon to assess whether we move there as originally planned or if the future holds something different for us,” Zhu added. “For now, things are very fluid and the main emphasis is on aiding the recovery process for creditors.”

As for Davies, “I have a feeling my next year is planned for me,” he said.

From $10 billion to zero: How a crypto hedge fund collapsed and dragged many investors down with it


KEY POINTS
The bankruptcy filing from Three Arrows Capital (3AC) triggered a downward spiral that wrapped in many crypto investors.

The hedge fund failed to meet margin calls from its lenders.

“3AC was supposed to be the adult in the room,” said Nik Bhatia, professor of finance and business economics at the University of Southern California.


WATCH NOW VIDEO 9:02   Bitcoin dips, Saylor dubs ether a security, and what caused crypto’s crash: CNBC Crypto World
As recently as March, Three Arrows Capital managed about $10 billion in assets, making it one of the most prominent crypto hedge funds in the world.

Now the firm, also known as 3AC, is headed to bankruptcy court after the plunge in cryptocurrency prices and a particularly risky trading strategy combined to wipe out its assets and leave it unable to repay lenders.

The chain of pain may just be beginning. 3AC had a lengthy list of counterparties, or companies that had their money wrapped up in the firm’s ability to at least stay afloat. With the crypto market down by more than $1 trillion since April, led by the slide in bitcoin and ethereum, investors with concentrated bets on firms like 3AC are suffering the consequences.

Crypto exchange Blockchain.com reportedly faces a $270 million hit on loans to 3AC. Meanwhile, digital asset brokerage Voyager Digital filed for Chapter 11 bankruptcy protection after 3AC couldn’t pay back the roughly $670 million it had borrowed from the company. U.S.-based crypto lenders Genesis and BlockFi, crypto derivatives platform BitMEX and crypto exchange FTX are also being hit with losses.

“Credit is being destroyed and withdrawn, underwriting standards are being tightened, solvency is being tested, so everyone is withdrawing liquidity from crypto lenders,” said Nic Carter, a partner at Castle Island Ventures, which focuses on blockchain investments.

Three Arrows’ strategy involved borrowing money from across the industry and then turning around and investing that capital in other, often nascent, crypto projects. The firm had been around for a decade, which helped give founders Zhu Su and Kyle Davies a measure of credibility in an industry populated by newbies. Zhu also co-hosted a popular podcast on crypto.

“3AC was supposed to be the adult in the room,” said Nik Bhatia, a professor of finance and business economics at the University of Southern California.

Court documents reviewed by CNBC show that lawyers representing 3AC’s creditors claim that Zhu and Davies have not yet begun to cooperate with them “in any meaningful manner.” The filing also alleges that the liquidation process hasn’t started, meaning there’s no cash to pay back the company’s lenders.

Zhu and Davies didn’t immediately respond to requests for comment.

Tracing the falling dominoes


The fall of Three Arrows Capital can be traced to the collapse in May of terraUSD (UST), which had been one of the most popular U.S. dollar-pegged stablecoin projects.

The stability of UST relied on a complex set of code, with very little hard cash to back up the arrangement, despite the promise that it would keep its value regardless of the volatility in the broader crypto market. Investors were incentivized — on an accompanying lending platform called Anchor — with 20% annual yield on their UST holdings, a rate many analysts said was unsustainable.

“The risk asset correction coupled with less liquidity have exposed projects that promised high unsustainable APRs, resulting in their collapse, such as UST,” said Alkesh Shah, global crypto and digital asset strategist at Bank of America.

Panic selling associated with the fall of UST, and its sister token luna, cost investors $60 billion.

“The terraUSD and luna collapse is ground zero,” said USC’s Bhatia, who published a book last year on digital currencies titled “Layered Money.” He described the meltdown as the first domino to fall in a “long, nightmarish chain of leverage and fraud.”

3AC told the Wall Street Journal it had invested $200 million in luna. Other industry reports said the fund’s exposure was around $560 million. Whatever the loss, that investment was rendered virtually worthless when the stablecoin project failed.

WATCH NOW VIDEO 08:18
How a $60 billion crypto collapse got regulators worried



UST’s implosion rocked confidence in the sector and accelerated the slide in cryptocurrencies already underway as part of a broader pullback from risk.

3AC’s lenders asked for some of their cash back in a flood of margin calls, but the money wasn’t there. Many of the firm’s counterparties were, in turn, unable to meet demands from their investors, including retail holders who had been promised annual returns of 20%.

“Not only were they not hedging anything, but they also evaporated billions in creditors’ funds,” said Bhatia.

Peter Smith, the CEO of Blockchain.com said last week, in a letter to shareholders viewed by CoinDesk, that his company’s exchange “remains liquid, solvent and our customers will not be impacted.” But investors have heard that kind of sentiment before — Voyager said the same thing days before it filed for bankruptcy.

Bhatia said the cascade hits any player in the market with significant exposure to a deteriorating asset and liquidity crunch. And crypto comes with so few consumer protections that retail investors have no idea what, if anything, they’ll end up owning.

Customers of Voyager Digital recently received an email indicating that it would be a while before they could access the crypto held in their accounts. CEO Stephen Ehrlich said on Twitter that after the company goes through bankruptcy proceedings, customers with crypto in their account would potentially receive a sort of grab bag of stuff.

That could include a combination of the crypto they held, common shares in the reorganized Voyager, Voyager tokens and whatever proceeds they’re able to get from 3AC. Voyager investors told CNBC they don’t see much reason for optimism.

WATCH: Voyager Digital files for bankruptcy amid crypto lender solvency crisis

Singapore's crypto aspirations shaken by Three Arrows collapse

By Alun John and Chen Lin - Jul 12

© Reuters/Darren Whiteside
 A view of the Monetary Authority of Singapore's headquarters in Singapore

HONG KONG/SINGAPORE (Reuters) - Singapore's ambitious cryptocurrency sector, by some measures Asia-Pacific's largest, faces an uncertain future after the recent collapse of crypto fund Three Arrows Capital, a high-profile casualty of the global digital currency downturn.

Crypto players in Southeast Asia's financial hub are bracing for further bankruptcies and legal tussles, and expect that regulators at the Monetary Authority of Singapore (MAS), whose welcoming approach helped to attract firms from China, India and elsewhere, may become less accommodating.


© Reuters/EDGAR SUFILE PHOTO:
 A representation of the virtual cryptocurrency Bitcoin

"After recent events it appears likely that the MAS will get tougher on crypto and digital assets," said Hoi Tak Leung, a senior technology sector lawyer at Ashurst.


Investment in Singapore's crypto and blockchain companies surged to $1.48 billion in 2021, according to KPMG, ten times the previous year and nearly half the Asia Pacific total for 2021.

Regulators at the MAS have said they hope to encourage crypto-related services, a sharp contrast with China's ban, a crypto tax in India that has crippled trading, and incoming rules in Hong Kong restricting crypto investing to professionals.

Over 150 crypto companies applied for a new crypto payments licence from the MAS in 2020, although so far only a handful have received one.

But the picture has grown murky with the collapse of Three Arrows Capital (3AC), which began liquidation proceedings in the British Virgin Islands on June 27, court filings showed, after the global downturn in digital currencies left it unable to meet hundreds of millions of dollars in obligations.

3AC did not respond to a request for comment, and its liquidators told a U.S. bankruptcy court they cannot locate the fund's founders, Kyle Davies and Zhu Su.

The ripple effects of 3AC's collapse - and the subsequent market turmoil - have been swift and severe. Singapore-based crypto lending and trading platform Vauld said last week that it would suspend withdrawals, and the following day a rival crypto lender said it planned to acquire the company.

Another fund, Mirana, is suing 3AC in Singapore over a loan agreement, local media reported, citing court filings which are not available publicly. Mirana did not reply to requests for comment.

In the United States, crypto lender Voyager Digital filed for bankruptcy last week, days after 3AC defaulted on a crypto loan worth $650 million it was owed, while crypto exchanges Genesis and Blockchain.com have also disclosed losses on their dealings with 3AC.

Rose Kehoe, managing director in Kroll's restructuring practice in Singapore, said in the coming weeks she expects crypto-related businesses facing liquidity issues to use Singapore's mechanisms for court protection of companies in restructuring.

"We will continue to see crypto markets globally being impacted by the contagion effect of recent market events, including in Singapore, a major cryptocurrency hub," she said.

Sector players are also wary of how Singapore's regulators may react.

"If Singapore decides to take a more hawkish approach towards crypto businesses in future, other countries in (Southeast Asia) could follow suit," said Jeff Mei, chief marketing officer at ChainUp, a Singapore crypto company.

"(This) could open a gap for Hong Kong to step into the arena more meaningfully."

MAS did not comment on the matter, but on June 30 it issued a rare public reprimand to 3AC for breaching fund rules, and added it was investigating the company on potential further breaches.

"I think (MAS) wanted to send a signal to the industry to say, '3AC was already on our watch list'," said Hagen Rooke, a Singapore-based partner at law firm Reed Smith. He said that such misdemeanours would normally be handled with a private wrap on the knuckles.

"The question is whether the MAS is going to become even more draconian in its approach to the crypto industry," he added, identifying new rules around crypto borrowing and lending as one likely regulatory focus.

(Reporting by Alun John in Hong Kong and Chen Lin in Singapore; Editing by Edmund Klamann)


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