Almost a year has passed since the collapse of one of the world’s largest hedge funds, and yet we have little to no clue as to what happened.
Were Su Zhu and Kyle Davies blinded by their own message? Were they destroyed by a lack of risk management? Or were their stops hunted and positions liquidated by Alameda, as they had previously claimed?
While time has managed to unravel most of last year’s “CeDeFi extinction event”, Three Arrows Capital’s co-founders have somehow managed to not only elude their creditors while continuing to post on Twitter, but have also embarked on a fresh entrepreneurial venture with their new claims marketplace, OPNX.
These recent developments have unfolded against a backdrop of ongoing efforts by liquidators to establish contact with them, even resorting to subpoenas via Direct Messages on Twitter.
But before we jump into the perplexing tale of how 3AC has managed to slip through the cracks of accountability, let’s take a moment to explore the origins of this predicament, and how we ended up here in the first place.
The Origins of Three Arrows Capital
Su Zhu and Kyle Davies first met at a top-ranking boarding school, from which their journeys began to intertwine.
The pair would eventually go on to the same college – Columbia, and even take the same first job at Credit Suisse.
Having made their way up, they eventually secured a million dollars in seed funding to lay the foundation for Three Arrows Capital, where the initial focus was on foreign-exchange (FX) arbitrage – a field in which Su demonstrated remarkable proficiency during his tenure at Credit Suisse.
As 3AC shifted their attention to cryptocurrencies, they profited off the industry’s nascency with two main strategies:
- The “Kimchi Premium”, also famously performed by Alameda Research, which involved buying Bitcoin locally and selling it at higher prices in South Korea, where regulations were stricter
- Cash-and-Carry trades, a market-neutral strategy that involved buying SPOT and selling futures in order to capture a price premium
Officially marketing themselves as “achieving consistent market neutral returns while preserving capital”, 3AC skillfully maneuvered their way into the cryptocurrency landscape, leveraging hefty loans to amplify their strategies while reaping substantial profits.
And yet, the first signs of trouble eventually came.
In 2019, 3AC tried to sell their stake in crypto options exchange Deribit for a straggering $700 million, which was later revealed to be a 250% markup on its actual valuation.
While these actions may have triggered suspicions, their staggering 5,900% return the next year could not be disputed, especially as they continued to showcase their affluence.
Although Crypto Twitter was no stranger to traders flaunting their wealth, Su and Kyle took it to the next level, putting a down payment for a $50m superyacht.
But the boat, christened “Much Wow” after a popular Dogecoin meme, was just the beginning.
Su Zhu and his wife purchased multiple luxury homes in Singapore, including a Good Class Bungalow valued at SGD$48.8M at the time.
“Between them, the two reportedly owned five upscale properties as well as luxury vehicles and yachts”, noted Tech in Asia.
Beginning of The End: The Three Arrows of Default
With business booming, the pair started to focus their attention elsewhere. One of these was the fabled GBTC, or Greyscale Bitcoin Trust arbitrage trade that Su often mentioned on social media.
In principle, the expectation surrounding GBTC was that, over time, it would converge with the value of its underlying assets, enabling holders to redeem them.
Through the strategic acquisition of discounted shares ahead of time, 3AC stood to gain substantial profits once GBTC reached parity.
In early 2022, 3AC also made a huge bet on Terra, investing $200M in exchange for its native token, $LUNA.
Unfortunately, both of these “savvy” opportunities turned out to be terrible investment decisions. GBTC slowly bled out, utlimately transitioning from a 50% premium to more than a 40% discount to Net Asset Value.
For Luna, everything happened all at once.
Within a mere few months of their substantial multimillion-dollar investment, $LUNA faced a rapid downfall and was permanently removed from the cryptocurrency leaderboards.
The ill-fated turn of events unfolded due to the failure of Terra’s native stablecoin, $UST, to uphold its intended peg.
Despite quick assurance and fundraising efforts from CEO Do Kwon, the investment lost all of its value seemingly overnight.
This marked the advent of the third arrow, characterized by a liquidity crunch.
Against the backdrop of these unfolding events, Three Arrows Capital (3AC) resorted to taking out substantial loans to sustain their arbitrage strategies.
However, as the market’s momentum waned, the availability of loans gradually diminished.
According to a report by New York Magazine’s Intelligencer, 3AC had a stipulation with creditor blockchain.com to notify them should there be an “overall drawdown of at least 4 percent”.
When blockchain.com reached out to them following the Terra incident, Kyle Davies simply replied with a “one sentence letter with no watermark, asserting that the firm had $2.387 billion net asset value.”
In reality, as Intelligencer reported, the pair had been trying to raise funds to meet existing loan obligations. Gone were the days when they could borrow as much money as they wanted to.
The illusion of stability: How 3AC Misrepresented Themselves To Creditors
Months following their disappearance, with nary a word to anyone, Su Zhu re-emerged.
While we eventually learned that this was in part due to the pair starting a new exchange, OPNX, which itself was not immune to controversy – landing them an official reprimand from Dubai’s Virtual Assets Regulatory Authority.
Despite his return, the precise details of what transpired with 3AC remained a mystery not only to the general public, but also to a growing list of creditors.
Although the pair had initially presented themselves as self-made entrepreneurs who had eschewed external financial backing, their downfall eventually shed some light on the reality of the situation.
In an interview with Bloomberg, they adamantly asserted that they had no “external investors” and relied solely on their own resources to build their empire.
However, it was later revealed that they had undertaken a staggering $3.5 bn in loans from more than 25 entities, undermining their proclaimed self-reliance.
Their largest individual creditor was Genesis, a company under Digital Currency Group, for $2.36 billion. Genesis, as well as a few other creditors, have since filed for bankruptcy due to their exposure to Three Arrows Capital.
Furthermore, it seems that 3AC had misrepresented their actual holdings multiple times., with their stake in cryptocurrency futures and options exchange Deribit being one such example.
As the majority holder of a Singaporean SPV which held the underlying Deribit shares, 3AC attempted to pledge their share as collateral for trades.
However, pledging it as collateral required the agreement of the other holders – something that they were not willing to sign off on.
Another example was Kyle Davies’ reassurance to blockchain.com that they had billions in net assets just weeks before the fund collapsed.
“We firmly believe they committed fraud. There’s no other way to state it” – Lane Kasselman, Chief Business Officer of Blockchain.com
Amidst mounting allegations, the duo adopted a strategy of silence, staunchly refusing to address the accusations hurled their way. Their liquidators, determined to pursue resolution, resorted to reaching out to them through direct messages on Twitter.
However, the co-founders remained elusive, evading direct engagement with their creditors and keeping their motives and intentions shrouded in mystery.
“The both of them are ignoring court orders everywhere, it’s like adding insult to injury for all of us [Creditors]”, noted a creditor who wished to remain anonymous
As the situation unfolded, an intriguing development emerged—the pair’s sudden relocation to Dubai.
This move sparked widespread speculation among industry observers, who hypothesized that their choice of destination was influenced by Dubai’s absence of an extradition treaty with Singapore, where they would face mounting scrutiny.
How Has Su Zhu Been Able To Evade Court Orders in Singapore?
Despite the challenges of reaching Su Zhu when he was abroad, the question arises: what about when he returns to Singapore?
Former BitMEX CEO Arthur Hayes has taken to Twitter to relentlessly call out both Su Zhu and Kyle, aiming to attract public attention and ensure accountability for their alleged actions.
Hayes, who currently resides in Singapore, has recently emerged as a creditor for 3AC.
Claiming that Su Zhu is in Singapore, he has taken to Twitter to demand the return of his alleged SGD$7.95 million loan.
Sources close to Chain Debrief have also confirmed that Su Zhu is currently in Singapore.
Ironically, Su Zhu has managed to obtain a restraining order on Hayes via a Singapore Court. This order prevents Hayes from publishing “any identity information” and prevents him from communicating with Su Zhu “by any means”, according to a report by CoinDesk.
In a surprising twist, the pair have managed to skilfully navigate legal proceedings, avoiding regulatory actions while using the legal system toward their own interests.
“The two of them are ignoring court orders everywhere, refusing to co-operate – and a lot of us [Creditors] are wondering why they can still act with such impunity.” a creditor told Chain Debrief.
The current investigation of 3AC is in stark contrast to other collapsed crypto entities.
Celsius, a cryptocurrency lending platform based in the United States, has already begun to redistribute their users’ assets after undergoing financial restructuring. The founder of Celsius Alex Machinsky is also being sued by NY attorney general for crypto fraud which happened at the same time as 3AC’s collapse.
Even outside of Web3.0, fraudulent businesses are being taken to task.
O.K. Lim, a former oil tycoon, is currently facing a total of 130 charges “involving SGD$3.6 billion in alleged fraudulent loans disbursed.”
Without a doubt, the collapse of 3AC was one of the most high-profile incidents to take place worldwide.
Being a Singapore-based company, surely there would have been action taken against them by now.
Unfortunately, both creditors and the public have yet to receive proper updates from the duo.
The singular official notice currently available is the Monetary Authority of Singapore’s official reprimand of 3AC for “providing false information and exceeding assets under management threshold.”
Seeking Transparency: Why Hasn’t Action Been Taken Against 3AC?
Regulatory measures against 3AC have been notably slow to materialize, once again diverging from previous instances of swift action.
Despite the glaring signs of noncompliance and the mounting concerns surrounding Three Arrows Capital’s actions, the lack of proactive steps being taken raises significant questions.
The co-founders’ apparent reluctance to actively participate has created a sense of protection, leaving creditors and the public questioning the issues’ inertia.
“It has been 9 months since Singapore court has recognised the BVI liquidation under the UNCITRAL Model Law on Cross-Border Insolvency as adopted in Singapore. In fact in September 2022, the Singapore court granted an order for the founders of 3AC to cooperate with the liquidators.”
A reliable source close to Chain Debrief, who possesses legal expertise in this matter, commented.
“It is quite inconceivable that it has been months since that order was granted with no sign of cooperation from the founders but the liquidators still have not taken further steps to compel the founders to cooperate, for instance by taking out contempt proceedings.”
Failure to comply with court orders, including those issued by the liquidators appointed in the 3AC case, could result in contempt of court charges being levied.
“Given the publicly available facts of the circumstances around 3AC’s liquidation, it is also particularly strange to me that the liquidators have not yet sought to make the two founders personally liable, perhaps by way of wrongful trading, negligence or breach of fiduciary duties. The causes of actions and the means of enforcing against the founders are present, for some reason or other we just haven’t seen those levers pulled yet.”
When Will 3AC Face Legal Scrutiny and Appear in Court?
With the latest update on the official liquidator’s Twitter account on Apr 22nd this year falling on deaf ears, a shadow of doubt has been cast over the prospects of closure for all parties involved including liquidators, creditors, as well as the general public.
In spite of receiving subsequent orders to appear in the BVI (British Virgin Islands) Court via Zoom, the pair has adamantly refused to comply, seemingly obtaining a sense of impunity in their noncompliance. Including the latest notice pertinent to the case, one that concerns investors of their “Starry Night” NFT fund rather than those being questioned, no further orders have been issued against the two at the time of writing.
“They [Su Zhu and Kyle] should be taken to court, even if it doesn’t work out” a creditor who wished to remain anonymous, told Chain Debrief.
Regardless of the outcome, all those involved in the intricate situation yearn for transparency, resolution, and closure on the matter.
Did they knowingly engage in fraudulent behavior as Blockchain.com claimed, or were they mere casualties of a more complex crypto landscape, as Su Zhu often suggests on Social Media?
While similar instances have witnessed expedient action, the Three Arrows Capital predicament has left many perplexed, and even more wondering what has prevented the case from moving forward.
The absence of substantial updates and decisive actions from both regulatory entities and the Co-Founders themselves, leaves behind a void of clarity.
Despite almost a year having passed since the issue began, it appears that the initial inertia, whatever the reason may be, has fostered a frustrating state of stagnation for all involved.
[Editor’s Note: This article does not represent financial advice. Please do your research before investing.]
Featured Image Credit: Chain Debrief