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Three Arrows Capital was a darling among crypto investment firms for years. Now, amid the crypto bear market and after the Terra collapse last month, 3AC appears to be at real risk of insolvency and crypto companies have taken steps to insulate themselves from the distressed firm.
Rumors that the Singapore-based firm could be insolvent started swirling last weekend. Since then, co-founder Su Zhu has only said cryptically on Twitter that Three Arrows, which also goes by 3AC, was "in the process of communicating with relevant parties and fully committed to working this out."
On Tuesday, it emerged that 3AC had begun selling off assets, including $40 million worth of its Lido Staked Ethereum (stETH). It's also widely believed, although still unconfirmed, that 3AC has been trying to keep a $264 million Aave loan and $35 million Compound loan from going into liquidation.
3AC also had heavy Terra exposure. When Do Kwon's Luna Foundation Guard (LFG) made another $1.5 billion Bitcoin purchase on May 5 to prop up Terra's stablecoin reserves, it was with the help of 3AC.
BitMEX on Friday confirmed that it liquidated Three Arrows Capital positions this week. Just yesterday, BitMEX co-founder Benjamin Delo reached a $10 million settlement with the Commodity Futures Trading Commission (CFTC) to avoid prison time over failure to "establish, implement and maintain an Anti-Money Laundering (AML) program."
Meanwhile, staking platform Finblox, which counts Three Arrows as an investor, has reduced customer withdrawal limits.
Finblox, a staking and yield earning platform that promised "up to 90% APY" on customer deposits, has "paused all reward distributions, updating withdrawal limits and disabled the creation of new crypto addresses until further notice," according to a statement on its website.
Users can withdraw up to $500 worth of their assets per day, with a monthly cap of $1,500. The company, which also shared its statement on Twitter, said it's been working with Three Arrows Capital and its other partners to "spread the risk as evenly as possible."
In March, Three Arrows had participated in Finblox's $3.9 million strategic round. "We have been cooperating with over 8 partners and protocols, including 3AC, to generate yields and spread the risk as evenly as possible," Finblox wrote. "Based on currently available information and our priority to maintain the integrity of the platform - we have decided to take the following actions while pursuing all available options to evaluate the effect of 3AC on the liquidity, and ensure fair treatment of all user assets in the system."
Crypto derivatives exchange Deribit, which counts 3AC as a shareholder of its parent company, DRB Panama, said yesterday on Twitter it considers the small amount of debt the firm has with it "potentially distressed."
"Even in the event that none of this debt is repaid to us, we will remain financially healthy and operations will not be impacted," the firm wrote in a short Twitter thread. "We can confirm all customer funds are safe and the full insurance fund will remain intact as is. Any potential losses will be covered by Deribit."
Even in the event that none of this debt is repaid to us, we will remain financially healthy and operations will not be impacted.
We can confirm all customer funds are safe and the full insurance fund will remain intact as is. Any potential losses will be covered by Deribit.
— Deribit (@DeribitExchange) June 16, 2022
On Friday morning, The Wall Street Journal reported that the Singapore-based company has hired legal and financial advisers to help it negotiate with its lenders. 3AC co-founder Kyle Davies said Three Arrows has been considering selling more of its assets or being bought out by another firm.
"We were not the first to get hit," he told the WSJ. "This has been all part of the same contagion that has affected many other firms."
The Singapore-based firm, which had about $3 billion in assets under management in April, has invested in dozens of other crypto startups.
This year alone, Three Arrows led a $150 million Series B round for Layer 1 Near and a $9 million Series A for stablecoin swap protocol Bastion, co-led a $20 million round with Delphia Digital for play-to-earn NFT game Civitas and invested an undisclosed amount in a $200 million strategic round for Layer 1 Aptos.