Three Arrows Capital

Three Arrows Capital
Name	Three Arrows Capital
Type	Hedge fund
Founded	2012
Founders	Su Zhu; Kyle Davies
Fate	Bankruptcy (2022)
Headquarters	Singapore
Industry	Cryptocurrency; Investment

Three Arrows Capital

Three Arrows Capital was a cryptocurrency-focused hedge fund founded in 2012 that became a prominent participant in digital-asset markets before collapsing in 2022; its activities linked it to major firms and events in the cryptocurrency sector such as Binance, Sam Bankman-Fried, FTX, Terraform Labs, Do Kwon, and LUNA. The firm engaged with counterparties and platforms including Celsius Network, BlockFi, Bilateral Credit, Voyager Digital, and Galaxy Digital, drawing scrutiny from authorities like the Monetary Authority of Singapore and regulators in the United States and United Kingdom. Its failure triggered litigation, insolvency proceedings, and market reverberations involving institutions such as Goldman Sachs, Republic Protocol, KuCoin, and BitMEX.

History

Three Arrows Capital was founded by Su Zhu and Kyle Davies after prior careers connected to Singapore Management University networks and trading desks that interacted with entities like Teneo Network, Cebu Pacific, and Goldman Sachs alumni; the firm rose during the 2017–2021 crypto bull cycles alongside projects such as Bitcoin, Ethereum, Solana, and Avalanche. During 2019–2021 the firm expanded investments into token issuance and venture funding, taking positions in tokens tied to Terra, Axie Infinity, Compound (protocol), Aave, and SushiSwap while participating in private rounds alongside Andreessen Horowitz, Pantera Capital, Polychain Capital, and Sequoia Capital. As markets shifted in 2022, exposure to the collapse of Terra (blockchain), the contagion from the FTX collapse, and margin calls from counterparties like Genesis Global Capital and Celsius Network precipitated a liquidity crisis, culminating in insolvency filings that involved courts in Bermuda and the United States District Court for the Southern District of New York.

Business model and investment strategy

The firm operated as an arbitrage and directional trading hedge fund executing macro and crypto-specific strategies similar to those used by entities such as Citadel LLC, Bridgewater Associates, Renaissance Technologies, and crypto-native funds like Pantera Capital and Polychain Capital; it employed leverage, derivatives, and spot positions across venues including Binance, Coinbase, Kraken, and FTX. Investment allocations included early-stage token allocations obtainable through private sales with projects like Terra, Solana, Avalanche (blockchain), and NEAR Protocol, and secondary-market trading in Bitcoin futures and Ether derivatives cleared on platforms such as CME Group and OKEx. Three Arrows used counterparty financing arrangements akin to prime brokerage offered by Galaxy Digital and Genesis Global Capital, and participated in decentralized finance markets like Uniswap, Curve Finance, and MakerDAO to access yield and liquidity. The fund’s use of concentrated positions and cross-margining practices mirrored risks seen in episodes involving Long-Term Capital Management and leveraged players during the 2008 financial crisis.

Key personnel and corporate structure

Founders Su Zhu and Kyle Davies were the public faces; corporate entities and affiliates were incorporated across jurisdictions including Singapore, British Virgin Islands, and Bermuda as with many hedge funds like Elliott Management and Och-Ziff Capital Management. The firm’s personnel roster featured traders, risk managers, and advisors interacting with institutions such as BitMEX, CoinShares, Galaxy Digital, and venture groups like a16z Crypto; relationships extended to counterparties including Celsius, BlockFi, Voyager Digital, and Alameda Research. Governance and reporting structures drew scrutiny because of cross-jurisdictional complexity similar to other global funds that used offshore vehicles to engage with exchanges such as Binance US, Coinbase Pro, and Kraken Futures.

Collapse and bankruptcy proceedings

The collapse began in mid-2022 following extreme market moves and specific events like the Terra (blockchain) collapse and liquidity squeezes tied to FTX collapse; creditor actions by firms such as Genesis Global Capital, BlockFi, and Voyager Digital accelerated proceedings. Three Arrows failed to meet margin calls, resulting in court filings for liquidation in Bermuda and Chapter 15 recognition in the United States; administrators and liquidators invoked insolvency frameworks similar to cases involving Lehman Brothers and Mt. Gox. Legal motions involved the Supreme Court of Bermuda, the United States Bankruptcy Court for the Southern District of New York, and enforcement actions coordinated with regulators such as the Monetary Authority of Singapore and the Financial Conduct Authority.

Regulatory and legal actions

Regulatory scrutiny implicated agencies including the Monetary Authority of Singapore, the Financial Conduct Authority, the United States Securities and Exchange Commission, and the Commodity Futures Trading Commission as counterparties and plaintiffs sought relief; litigation alleged breaches of contract, fraudulent conveyance, and improper asset transfers analogous to claims in prior financial collapses like Lehman Brothers litigation. Asset recovery efforts involved forensic tracing through blockchains such as Bitcoin, Ethereum, and Solana and coordination with exchanges like Binance, Coinbase, Kraken, and FTX custodian records to identify recoverable funds. Investigations referenced counterparties including Celsius Network, Genesis, BlockFi, Voyager, Alameda Research, and entities associated with Do Kwon and Terraform Labs.

Market impact and aftermath

The collapse contributed to a broader deleveraging across crypto markets that affected prices of Bitcoin, Ether, TerraUSD (UST), and numerous tokens listed on Uniswap and centralized exchanges, exacerbating contagion alongside the FTX collapse and leading to increased risk aversion among institutional investors like BlackRock and Fidelity Investments. It prompted calls for strengthened oversight from bodies such as the International Organization of Securities Commissions and accelerated initiatives by exchanges including Coinbase and Binance to enhance custody and counterparty due diligence. Litigation and recovery efforts continued across jurisdictions with involvement from creditors such as Galaxy Digital, BlockFi, and Voyager Digital, influencing restructuring practices and regulatory reforms in crypto markets similar to post-crisis changes after events like Lehman Brothers and Bear Stearns.

Category:Cryptocurrency companies