Three Arrows Capital

Three Arrows Capital was a Singapore-based cryptocurrency hedge fund founded in 2012 by Su Zhu and Kyle Davies.³⁶¹⁰ The fund collapsed in 2022 after suffering heavy losses from the crypto market downturn and failed trades, leading to liquidation proceedings in the British Virgin Islands.^2568131618 Its founders later faced legal consequences, with Zhu arrested and sentenced to prison in Singapore, while Davies remained at large.³¹⁴

Timeline

Money raised

Three Arrows Capital managed around $18 billion in crypto assets at its peak.³ Digital Currency Group Inc. filed a claim of about $1.2 billion against Three Arrows.² Three Arrows Capital failed to make required payments on a loan worth more than US$665 million from Voyager Digital.⁶⁹ The fund was once valued at over $10 billion.⁷ Su Zhu and Kyle Davies sought to raise $25 million in seed money for their new platform GTX.²⁷ GTX estimated there is a $20 billion market for crypto claims.²⁷

Investors named in the sources: Polychain Capital¹², Three Arrows Capital¹².

What happened

Three Arrows Capital was a Singapore-based hedge fund management company specialising in emerging markets.¹⁰ The fund was set up in May 2012 with the focus to trade market fragmentation in emerging markets.¹⁰ Kyle Davies and Su Zhu met in high school at Phillips Academy, studied math and economics together at Columbia University, and then worked with each other in Hong Kong in various derivatives trading roles.¹⁰ In July 2014 Lance Fithian, formerly Co-Head of Origination and Structuring-Asia Pacific at Newedge, joined Three Arrows as President and Chief Operating Officer.¹⁰ Three Arrows Capital was incorporated on 3 May 2012 in the British Virgin Islands as an investment fund in the business of trading and dealing in cryptocurrency and other digital assets.¹³

The Company was set up by Su Zhu and Kyle Livingston Davies and registered as a Professional Fund with the Financial Services Commission of the BVI.¹³ Until September 2021 the Company's investment manager was Three Arrows Capital Pte Ltd, a company incorporated in Singapore; in September 2021, ThreeAC Ltd, a company incorporated in the BVI, took over as the Company's investment manager.¹³ The Company operated a master-feeder fund structure: the Company was the master fund, with an offshore feeder fund (Three Arrows Fund Ltd) and an onshore feeder fund (Three Arrows Fund, LP).¹³ As of 31 December 2021, 99% of the equity in the Company was owned by TAF Ltd; the remaining 1% was held by TAF LP.¹³ Three Arrows Capital became known for its bullish trades and excesses.⁶

Zhu had previously argued that the value of cryptocurrencies would continue to rise in his 'supercycle' thesis.⁶ The fund was known for holding a large quantity of Grayscale Bitcoin Trust, as well as staked ether tokens.⁶ Three Arrows Capital suffered heavy losses after the crypto market downturn in mid-2022 and for making large trades in coins like LUNA and Terra that failed to pan out.³ The value of LUNA tokens collapsed in May 2022, causing heavy losses for Three Arrows Capital, which had invested over US$200 million in LUNA.⁶ Several creditors began to liquidate positions opened by Three Arrows Capital, including US-based crypto lender BlockFi and Genesis.⁶

Crypto broker Voyager Digital issued a notice of default to Three Arrows Capital after the fund failed to make the required payments on a loan worth more than US$665 million.⁶⁹ A British Virgin Islands court ordered the liquidation of Three Arrows Capital on 27 June 2022.^2561316 Teneo was appointed as joint liquidators of Three Arrows Capital through the court order.⁶ On 1 July 2022, the Foreign Representatives filed a petition in the Southern District of New York seeking relief under chapter 15 of the Bankruptcy Code.¹⁶ On 28 July 2022, the Bankruptcy Court recognized the BVI liquidation as a foreign main proceeding.¹⁶

Digital Currency Group Inc. filed a claim of about $1.2 billion against Three Arrows.² Su Zhu and Kyle Davies fled and went on the run after the liquidation.³ Su Zhu was arrested at Changi Airport in Singapore in September 2023 and sentenced to four months in prison for failing to coordinate with liquidators.³ Kyle Davies remained at large and his location was unknown, though he claimed to be staying in Portugal.³ Kyle Davies renounced his US citizenship in December 2020 and became a Singapore citizen in January 2021.³¹⁴

GTX was a poke at the fallen crypto exchange FTX, and the name was not final.² The other founders of GTX included Kyle Davies, Mark Lamb and Sudhu Arumugam, the co-founders of crypto exchange CoinFLEX.²⁷ GTX estimated there is a $20 billion market for crypto claims, based on the notional value of those claims.²⁷ Kyle Davies launched OPNX in Dubai in April 2023.³ Dubai's crypto regulator formally reprimanded OPNX for operating an unregulated exchange months after its launch.³

OPNX was shut down in February 2024.³ Davies said he had no plans to return to Singapore 'immediately' but would consider it if the contempt order was dropped.³ The joint liquidators attempted to serve a subpoena on Kyle Davies via email and Twitter, but the bankruptcy court later denied a contempt motion because Davies had renounced his U.S. citizenship and was not subject to service under Rule 45(b).¹⁴ The bankruptcy court suggested the joint liquidators could pursue Davies in Singapore or file an action for damages in the U.S.¹⁴ A claimant named Cheong Jun Yoong filed a lawsuit against Three Arrows Capital and its liquidators, claiming that a portfolio of assets he managed constituted a standalone fund called DeFiance Capital and that the assets were held on trust for him and other investors.¹³

The claimant alleged that between November 2019 and early 2020, he discussed an arrangement with Su Zhu and Kyle Davies to launch an independent fund on the 3AC Group platform, which would be owned and controlled by the claimant.¹³ The claimant claimed that by May 2022, he had transferred or procured the transfer of USDT 22.3m and further amounts of cryptocurrencies and fiat currencies valued at US$93.8m to the DC Sub-Accounts.¹³ The DC Assets included SAFEs and SAFTs entered into between the Company and various third-party portfolio companies.¹³ The claimant had sole discretion and control over the management of the DC Fund, and only the claimant and his employees knew the passwords required to access the DC Sub-Accounts.¹³ The DC Fund did not exist as a legal entity, and the claimant managed it initially as an employee of the Company's then investment manager, TACPL, and subsequently as an employee of TAC Research Pte Ltd.¹³

The DC Assets were accounted for as forming a separate portfolio of assets associated with the Class Defiance Shares and Class Defiance Interests.¹³ In October 2021, the Company entered into a licence agreement with Fireblocks Ltd, a proprietary digital assets custody solutions provider, pursuant to which the Company stored cryptocurrency tokens.¹³

Legal outcomes

• filedA British Virgin Islands court ordered the liquidation of Three Arrows Capital on 27 June 2022.^2561316
• filedThe joint liquidators filed a petition in the Southern District of New York seeking relief under Chapter 15 of the Bankruptcy Code on 1 July 2022.¹⁶
• filedThe Bankruptcy Court recognized the BVI liquidation as a foreign main proceeding on 28 July 2022.¹⁶
• filedThe bankruptcy court held that the joint liquidators could serve a subpoena upon Kyle Davies via email and Twitter on 2 December 2022.¹⁴
• filedThe joint liquidators served the U.S. Subpoena on Kyle Davies by Twitter and email on 5 January 2023.¹⁴
• filedThe joint liquidators filed a motion to compel compliance with the U.S. Subpoena on 7 February 2023, which the bankruptcy court granted.¹⁴
• filedThe joint liquidators filed a Contempt Motion to compel Kyle Davies to comply with the U.S. Subpoena on 14 June 2023.¹⁴
• filedKyle Davies filed an opposition to the Contempt Motion on 1 August 2023, claiming he had renounced his U.S. nationality in December 2020.¹⁴
• dismissedThe bankruptcy court denied the Contempt Motion because Kyle Davies was not a U.S. citizen when the U.S. Subpoena was served, and thus the subpoena was not properly served.¹⁴
• convictedSu Zhu was arrested at Changi Airport in Singapore in September 2023 and sentenced to four months in prison for failing to coordinate with liquidators.³
• filedCheong Jun Yoong filed a lawsuit against Three Arrows Capital and its liquidators, claiming that the DC Assets were held on trust for him and other investors.¹³
• filedThe defendants in that lawsuit applied to set aside an order granting the claimant approval to serve the Originating Claim out of Singapore.¹³

Where the founders are now

Su Zhu was arrested at Changi Airport in Singapore in September 2023 and sentenced to four months in prison for failing to coordinate with liquidators.³ Kyle Davies remained at large and his location was unknown, though he claimed to be staying in Portugal.³ Kyle Davies renounced his US citizenship in December 2020 and became a Singapore citizen in January 2021.³¹⁴ In January 2023, Su Zhu said that he and others were seeking to raise $25 million in seed money for a new platform called GTX.² Kyle Davies launched OPNX in Dubai in April 2023, which was later shut down in February 2024.³ In March 2024, Kyle Davies said he had no plans to return to Singapore 'immediately' but would consider it if the contempt order was dropped.³

Lessons, as others put them

"Am I sorry for a company going bankrupt? No. Like companies go bankrupt, almost every company goes bankrupt, right?"Kyle Davies³

"It’s how you build or what you do about it. We’re definitely trying our best. We can add value in various ways. At a minimum, we can even tell the next Three Arrows how to do things better when they go bankrupt."Kyle Davies³

Sources

2. Founders of bankrupt Three Arrows Capital plan trading platform for distressed crypto debt, Fox Business, Jan 16, 20
3. Grinning failed crypto hedge fund owner Kyle Davies shows no remorse after losing $3.5B in investor cash: ‘Every company goes bankrupt’, New York Post, 2024-03-21
5. New turmoil rocks crypto as court orders hedge fund to ..., politico.com, Jun 29, 20
6. S'pore-based Three Arrows Capital fails to pay debts - now under liquidation due to insolvency, Vulcan Post, 2022-06-30
7. What Could Go Wrong? Bankrupt Crypto Hedge Fund Founders Create First ‘Distressed Debt Marketplace’, dot.LA, 2023-01-18
8. From $10 billion to zero: How a crypto hedge fund collapsed and dragged many investors down with it, CNBC, Jul 11, 20
9. Three Arrows Capital falls into liquidation after crypto crash, washingtonpost.com, Jun 29, 20
10. Three Arrows Capital: Fast growing emerging markets hedge fund - Opalesque TV, opalesque.tv
12. Polychain Capital, Three Arrows Capital Lead $230M ..., medium.com, 5 years ag
13. [2024] SGHC 21, elitigation.sg, Jan 26, 20
14. Three Arrows Capital Co-Founder Avoids Contempt and Sanctions in United States, But Bankruptcy Court Previews Worldwide Enforcement Options, Restructuring GlobalView, 2023-08-25
16. 3AC Bankruptcy | ArentFox Schiff, ArentFox Schiff
18. Crypto hedge fund Three Arrows files for Chapter 15 bankruptcy, CNBC, Jul 2, 202

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