Judge freezes assets of crypto hedge fund Three Arrows Capital

A federal bankruptcy court has frozen the assets of Three Arrows Capital, the once-prominent crypto hedge fund that managed as much as $10 billion in assets until it fell into liquidation last month.

In an emergency hearing Tuesday, Judge Martin Glenn of the Southern District of New York granted a motion allowing liquidators to “transfer, encumber, or otherwise dispose” of any Three Arrows Capital assets located in the United States. In addition, the court authorized subpoenas for the founders, whose whereabouts are unknown.

The Singapore-based company, also known as 3AC, was founded a decade ago by Su Zhu and Kyle Davies, who both studied at Columbia University in New York City and worked for the same investment bank before making their names as crypto influencers and managers of a multibillion-dollar fund. It did not, however, survive the broader crypto market meltdown that has erased hundreds of billions in value this year. Bitcoin, the most valuable digital currency, is trading below $20,000, having shed more than 70 percent of its value since last fall.

On June 27, crypto broker Voyager Digital said that Three Arrows Capital had not made payments on a loan worth more than $665 million. The same day, a court in the British Virgin Islands ordered the fund into liquidation. Four days later, 3AC filed for bankruptcy under Chapter 15 of the U.S. bankruptcy code, which allows a foreign debtor to deal with their U.S. assets.

The court-appointed liquidators — Russell Crumpler and Christopher Farmer of the global advisory firm Teneo — cited a “lack of cooperation to date” by Zhu and Davies in a July 8 filing, whose whereabouts they say are unknown. Though the fund’s lawyer, Christopher Anand Daniel of Singapore-based Advocatus Law, has been in contact, liquidators say, the co-founders have not begun to cooperate “in any meaningful manner.”

Shortly before the judge granted the emergency motion, Zhu tweeted two screenshots of email communications between Daniel and the liquidators, including one in which the 3AC lawyer called the July 8 filing “baiting.”

“It has come to our clients’ attention that you have made an application in the United States of America,” Daniel wrote to Crumpler, “it appears, therefore, that contrary to your representations that you were seeking to engage our clients in good faith, and constructively, you had already prepared to make that application, and were in fact baiting our clients.

Sadly, our good faith to cooperate with the Liquidators was met with baiting. Hope that they did exercise good faith wrt the StarkWare token warrants. pic.twitter.com/CF73xI8r6n

— Zhu Su (@zhusu) July 12, 2022

“Our clients, and their families have received threats of physical violence, and have had to field queries from the Monetary Authority of Singapore in the last week, or so, which has meant that they have been working under a lot of time pressure,” Daniel added.

But in Tuesday’s hearing, Teneo’s attorney Adam Goldberg said that the information provided was “by no means a sufficient form of cooperation,” CNBC reported.

The broader digital currency market has been getting battered for months. In May, Terra’s popular stablecoin terraUSD and its sister token luna collapsed, causing investors to lose nearly $60 billion. That helped bring down Three Arrows Capital, where Zhu and Davies had heavily promoted luna, and made the crypto lender suspend withdrawals. Terra’s founder, Do Kwon, was among the defendants named in a class-action lawsuit filed in U.S. District Court of North Carolina.

Last week, crypto lender Vauld announced it had suspended all withdrawals, trading and deposits for its 800,000 members after the steep fall in crypto values. The next day, London-based rival Nexo agreed to buy as much as 100 percent of the company. The crypto bank Celsius also was forced to freeze withdrawals in June.

Experts say the extreme volatility is sure to amplify calls for more oversight.

“Regulation is coming, and it’s coming soon,” said Kene Ezeji-Okoye, president of U.K.-based digital currency company Millicent. “Many in the industry will oppose this idea, but equally many are embracing calls for smart regulation, understanding that it’s the only way for the industry to truly reach mainstream adoption. However, regulators must be careful not to stifle genuine innovation.”

Ben Caselin, head of strategy and research at digital currency exchange AAX, said a path is opening to make the cryptocurrency market more sustainable.

“If anything, these liquidation events should pave the way to turn towards a more sustainable market structuring more strongly tethered to those core principles which inspired the creation of bitcoin but which for too long, during this bull market, have been marketed if not evangelized but not actually delivered by too many projects.”

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