Three Arrows Capital suffered heavy losses in the recent market downturn, which prompted insolvency calls. These heavy losses affected its ability to disburse funds to meet a margin call, after which Deribit made the liquidation push.
According to court filings in the British Virgin Islands, Deribit claimed, “the company is or is likely to become unable to pay its debts as they fall due, and therefore insolvent.”
The credit genesis
The credit relationship between Deribit and 3AC started in March 2020 after the crypto hedge fund borrowed bitcoin and ether from Deribit, the court documents revealed.
However, things started to turn sour on June 11, 2022, when the crypto market was experiencing massive sell-offs and prices tumbled. Due to the extreme volatility in the market, 3AC breached Deribit’s loan stipulation to have a minimum balance in its account.
On June 13, the derivatives exchange started liquidating 3AC’s position, and three days later, it terminated the agreement between them. Afterward, Deribit demanded payments for the account’s outstanding loans, interest, and negative asset value.
According to the court documents, Deribit demanded a total of $801.13 million, consisting mainly of 1,300 bitcoin and 15,000 ether in the loan, valued at around $42 million, and negative asset values of $37.1 million.
Blockchain.com also confirmed that it was one of the creditors that pushed for 3AC to be liquidated. A spokesperson of the company, in a statement to Bloomberg News, said,
“We believe Three Arrows Capital defrauded the crypto industry and intend to hold them accountable to the fullest extent of the law. We have filed for the immediate liquidation of all global assets of Three Arrows.”
Before the Deribit and Blockchain.com liquidation push, the crypto hedge fund had seen its positions with BlockFi and Genesis liquidated after failing to meet margin calls.
3AC ordered to liquidate
The British Island court on June 27 ordered 3AC to liquidate to repay its creditors. The order was issued after crypto broker Voyager Digital announced that 3AC had defaulted on a $670 million loan.
The court afterward appointed two senior members of US-based advisory firm Teneo to oversee the liquidation, according to sources familiar with the matter, the Washington Post reported.
It is unclear what the implications will be for 3AC’s creditors.
Considering 3AC’s significant position in the credit market, fears of a broader market have emerged and further intensified the credit crisis in the digital market. To worsen the matter, the crypto hedge fund now has regulatory concerns to bother about.
On June 30, Singapore’s financial regulator came knocking on 3AC’s door after claims that it provided false information about its operations in the country.