Reasons For Bankruptcy and Liquidation of Three Arrows Capital

Three Arrows Capital: Reasons For Bankruptcy And Liquidation

Three Arrows Capital, which is also known as, TAC or 3AC, a former Singapore-based crypto hedge fund founded by Kyle Davies and Su Zhu has been in the ‘spotlight’ for all the wrongs happening to the firm. The situation became worse to an extent that a court in the British Virgin Islands ordered the firm to liquidate on June 27, 2022, marking the end of TAC.

There have been several instances where the company was accused and confirmed of serious offenses in the eyes of law.  One of the major factors that led to this mishap has to be the volatility of the crypto market and the uncertainty that comes with it. However, by careful supervision and the right actions, TAC could have avoided these negative outcomes.

What Happened With Three Arrows Capital?

One of the major crypto hedge funds until a week ago, collapsed due to the “crypto-winter” that has been prevalent since December 2021. The frequent red sessions and a number of crypto crashes waved off millions of dollars of the hedge fund. Moreover, the market didn’t recover quite effectively and dipped further making the firm’s financial statistics worse.

As a result of these losses, Three Arrows Capital was in extreme debt and invited in, a pool of accusations, court filings, and hearings. In line with the above-mentioned events, a class action lawsuit titled ‘Patterson v. TerraForm Labs Pte Ltd. et al’ had been filed against 3TAC and some others on June 17, 2022. The filing was done with the United States District Court for the Northern District of California.

A day prior to the filing, Financial Times published a report that mentioned that TAC was unable to meet its financial margin calls, which was another blow for the hedge fund. Further, on June 22, 2022, the Wall Street Journal brought to light the fact that TAC had failed to repay the debt it borrowed from a major crypto broker, Voyager digital.

Thereafter, on June 27, 2022, the crypto broker released a notice of default against TAC as it was incapable of repaying the debts on a loan on Bitcoin (BTC) and USD Coin that was worth over $665 million. On the same day, it was ordered to liquidate by the court in the British Virgin Islands. Therefore, Three Arrows Capital ceased to exist.

The biggest tragedy struck on June 30, 2022, 3AC was reprimanded by the Monetary Authority of Singapore (MAS) charging it with a breach of the permitted threshold of $250 million SGD to be withheld in assets under management (AUM). This was the ultimate blow to the hedge fund since it came after the firm was ordered to liquidate.

Reasons For Liquidation and Bankruptcy

The two major reasons for Three Arrows Capital’s bankruptcy and liquidation order are discussed below:

1. Crypto Winters

The recent bearish sessions in the crypto market affected several investors and investment agencies. However, it seems that 3AC was one of the worst affected parties. This is because, even the largest cryptocurrency, Bitcoin (BTC), lost over 50% of its value since December 2021 and reached below the $19,000 mark.

Three  Arrows crypto investments included Terra (LUNA), wherein TAC had significantly invested. LUNA also fell over 99% and dropped to almost ‘zero’. However, the exact statistics of the investment and losses of the firm in LUNA weren’t made available by the firm. But some reports suggest that TAC’s LUNA investments were worth about $600 million which later slumped to a mere $670 (approximately). These major forfeits were a reason why the hedge fund was not able to repay the loans it took for making these investments. These failures, in turn, led to the liquidation of the company.

The Three Arrows Capital net worth included a net asset value of $18 billion before the firm’s closure. It also included about $10 billion acquired in 2022 itself from crypto investments undertaken. However, it seems that the asset value was not enough for repaying debts. Thereafter, the company went ahead in terms of bankruptcy and insolvency, paving the way for 3AC’s liquidity crises. After Voyager Digital released the notice of defaults, the court had no other choice but to order the firm to liquidate in order to repay the huge debts that it had taken.

2. Three Arrows Capital’s AUM Deviation

The hedge fund failed to maintain the $250 SGD threshold for its assets under management. This was mentioned as a condition in the fund management company registration in August 2013. The MAS rebuked the firm for the discrepancy it had caused. Moreover, it was also censured for the provision of misleading information to the MAS. The company didn’t notify about the alterations in its shareholdings and directorships. All these wrong undertakings and misconduct played a vital role in the firm’s unprecedented closure and bankruptcy. A day after MAS  took the aforementioned action, the company filed for U.S. Chapter 15  bankruptcy in the country’s bankruptcy court.

The former hedge fund’s closure is expected to influence the crypto domain largely as it has led to the withdrawal of millions of investments earlier made by the firm. Three Arrows Capital group might find a way back into the crypto industry in the future but such a development is currently distant.

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