Three Arrows Capital, once one of the largest and most prominent cryptocurrency hedge funds, has been ordered into liquidation by a court in the British Virgin Islands. The collapse of the fund — which at its peak managed approximately $10 billion in assets — is now triggering a cascade of counterparty failures across the crypto lending and trading industry.
The unravelling began in the wake of the Terra/Luna collapse in May 2022. Three Arrows Capital (3AC) had significant exposure to the Terra ecosystem, including a reported $200 million investment in the Luna Foundation Guard. When TerraUSD lost its peg and Luna collapsed to near zero, 3AC suffered immediate, substantial losses.
Those losses triggered margin calls from the fund’s prime brokers and lending counterparties. Unable to meet the calls, 3AC defaulted on obligations to multiple institutional lenders. The scale of those defaults is now becoming clear. Voyager Digital has disclosed a $650 million exposure to 3AC. Genesis, the digital asset lending arm of Digital Currency Group, has reported losses in the hundreds of millions. BlockFi has acknowledged significant exposure. Celsius Network — which froze customer withdrawals on June 12, before 3AC’s liquidation was publicly known — is widely reported to have lent to 3AC and is now itself facing an existential crisis.
The co-founders, Su Zhu and Kyle Davies, have gone largely silent since the liquidation order. Zhu tweeted cryptically in mid-June that the firm was “in the process of communicating with relevant parties” and working on solutions — but no restructuring has materialised. The BVI court has appointed Teneo as liquidator.
Details of 3AC’s investment strategy are still emerging, but the picture is of a fund that took large, concentrated, and highly leveraged positions across the crypto ecosystem — including Luna, GBTC (the Grayscale Bitcoin Trust), and staked Ethereum products — without adequate risk management or hedging. The fund reportedly used assets deposited by one lender as collateral with another, creating a web of interconnected obligations that unravelled simultaneously when the market turned.
The Monetary Authority of Singapore has placed 3AC under investigation for providing false information to the regulator, including misrepresenting the fund’s assets under management and failing to notify MAS of changes in its business operations.
Systemic risk in an unregulated market
Three Arrows Capital is the crypto equivalent of Long-Term Capital Management — a leveraged fund whose concentrated positions and interconnected counterparty relationships turned a single-fund failure into a systemic event. The comparison is instructive, both in the parallels and the differences.
LTCM, when it collapsed in 1998, managed roughly $5 billion in capital and had approximately $125 billion in balance sheet assets. The Federal Reserve organised a private-sector bailout because LTCM’s derivatives counterparties were the largest banks in the world, and an uncontrolled unwind threatened the entire financial system. The episode led directly to new regulatory requirements for hedge fund leverage and counterparty risk management.
Three Arrows Capital managed roughly $10 billion and was interconnected with virtually every major lending and trading platform in crypto. But there is no crypto equivalent of the Federal Reserve. There is no lender of last resort. There is no coordinated mechanism for managing an orderly unwind. When 3AC defaulted, its counterparties — Voyager, Celsius, Genesis, BlockFi — each faced their own liquidity crises independently, with no institutional backstop.
From a financial crime and compliance perspective, the 3AC case highlights a governance vacuum that should concern everyone in this industry. A fund managing $10 billion was operating from Singapore with minimal regulatory oversight, no obligation to disclose its positions or leverage, and no independent audit of its risk management. The counterparties that extended credit to 3AC — some of them managing billions in retail deposits — apparently did so without conducting the kind of counterparty due diligence that would be standard practice in traditional prime brokerage.
The contagion we are witnessing now — Voyager frozen, Celsius frozen, Genesis impaired, BlockFi seeking emergency financing — is not a natural disaster. It is the predictable consequence of an interconnected financial system operating without the safeguards that traditional finance learned to impose after its own crises.