Crypto derivatives exchange Deribit has revealed it began liquidation action against Three Arrows Capital (3AC), which has been struggling for weeks following huge losses on its investments.
Deribit confirmed to The Block today that it led the liquidation application in a British Virgin Island’s court against 3AC.
The admission comes a day after the Singapore markets regulator, the Monetary Authority of Singapore (MAS), reprimanded 3AC for “providing false information to MAS and exceeding the assets under management threshold”.
In a statement, MAS revealed that 3AC had told it the management of its only fund had been changed to an offshore entity in the British Virgin Islands in September 2021. “However, this representation was misleading as Three Arrows Capital and the offshore entity shared a common shareholder, Mr Su Zhu,” added MAS.
Background to liquidation application
It was on 15 June that reports began to circulate that the Singapore-based fund was consolidating its holdings, including its collections of non-fungible tokens (NFTs).
Then on 29 June, Sky News reported a court order was made in the British Virgin Islands to liquidate 3AC, which was now working with insolvency with management consultant company Teneo.
Russell Crumper and Chrisopher Farmer, two senior members at Teneo, have been appointed to help manage the liquidation, according to the Financial Times. In addition, Teneo will also set up a website that will allow creditors of 3AC to submit claims in order to receive more information on the matter, according to the The Washington Post.
Voyager Digital issued default notice
The reported court order comes after a subsidiary of Voyager Digital, a US-based cryptocurrency platform, issued a default notice to 3AC on Monday 27 June because it had missed the deadline to repay a Bitcoin loan.
The default notice related to 3AC being unable to meet payments on a loan of 15,250 BTC, worth about $305m, and $350m of USD Coin (USDC).
Voyager had previously asked 3AC for the repayment of $25m in USDC by 24 June before later requesting the entire amount to be repaid by 27 June. Voyager had previously warned it may issue a default notice following discussions about what legal action it could take.
Voyager bolstered by Bankman-Fried
Voyager has not followed other crypto lenders, such as Celsius Network and Finblox, in halting withdrawals, but its daily withdrawal limit has been reduced from $25,000 to $10,000.
Last week, (20-24 June), Voyager saw its stock sink by 47% as a result of its exposure to 3AC, from CAD1.45 to CAD0.77. At the time, this represented a 94% fall since the start of the year.
Voyager has received a lifeline in the form of a $500m loan from Alameda Research, according to announcement on 22 June that it had borrowed 15,000 BTC from the Hong Kong-based firm founded by Sam Bankman-Fried.
On a number of occasions, Bankman-Fried has stepped in to provide liquidity to embattled cryptocurrency firms. FTX, the prominent cryptocurrency exchange of which the billionaire is CEO, recently provided a $250m revolving credit facility to embattled crypto lender BlockFi.
Confirming the support for Voyager, Bankman-Fried tweeted: “We take our duty seriously to protect the digital asset ecosystem and its customers.”
How Three Arrows’ losses began to mount up
It was an analysis earlier in June by Messari.io of 27 assets that Three Arrows Capital had invested in which suggested 3AC may have lost around 60% of its investments for the year to date. The assets included lead cryptos such as Bitcoin(BTC), Ethereum (ETH), and Avalanche (AVAX).
In addition to the 27 assets identified by Messari.io, the Twitter account for The Defi Edge reported 3AC had also spent $559.6m buying locked LUNA before the cryptocurrency’s collapse last month. “It’s now worth roughly ~$670,” added The Defi Edge.
Danny Yuan, head of trading at crypto trading firm and liquidity provider 8BlockCapital, suggested Three Arrows Capital was “leveraged long everywhere”.
“What we learned is that they [3AC] were leveraged long everywhere and were getting margin-called,” tweeted Yuan. “Instead of answering the margin calls, they ghosted everyone. The platforms had no choice, but to liquidate their positions, causing the markets to further dump.”
The Starry Night Capital NFTs
The fund was also reportedly starting to consolidate its NFT holdings, in a possible attempt to sell them and cover its losses. It had amassed a large collection of non-fungible tokens (NFTs) last year, such as ones from the Fidenza and Ringers NFT collections, and secured A Poetic Beach by the Chinese digital artist Dabeiyuzhou at Sotheby’s with a $140,000 bid.
In the run up to Wednesday 15 June, the 3AC NFT fund, Starry Night Capital, had reportedly movied its entire collection from the NFT platform SuperRare – a total of 70 NFTs 3AC had spent more than $21m building up since August last year.
Kyle Waters, analyst at CoinMetrics – a cryptomarket analysis firm – said: “All of the [SuperRare] SR works were sent to a single address along with pieces from Art Blocks, KnownOrigin, Foundation, and other crypto art projects.
“The new wallet seems to have some linkage to other 3AC wallets but it’s unclear so far what’s going on (at the worst case, gearing up for some sort of liquidation/OTC block trade of NFTs?)
“It’s also unclear if NFT sales would even move the needle very much versus other positions.”
NYC Journals 