Client accuses Bitcoin, Ethereum backer Three Arrows Capital of misappropriating funds

A Hong Kong-based client of Three Arrows Capital (3AC) has accused the crypto hedge fund founded in Singapore of meeting its margin calls with clients’ capital as well as ghosting on customers seeking to withdraw their funds. 

Three Arrows Capital did not respond to Forkast’s multiple requests for a comment via email and telephone. Messages sent to cofounder Kyle Davies on his verified Twitter handle went unanswered. 

In a thread on his verified Twitter handle, Danny Yuan, chief executive officer of 8 Blocks Capital, accused 3AC of taking out about US$1 million from the quantitative proprietary trading firm’s book.

“On June 12th, with the market dropping and needing some funds from the account for positions on other exchanges, we asked for a withdrawal from the operations team which was honored,” Yuan said. 

The next day, with markets in free fall and cryptocurrencies getting pummeled, 8 Blocks asked to withdraw a larger sum, Yuan said. 

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“There was no reply but we didn’t think much of it at the time,” Yuan said. “After a while, the market stabilized so we no longer needed the funds,” he added. “We thought maybe they were just busy.”

But some 24 hours ago, 8 Blocks’ funds monitoring script noticed that about a million dollars was missing and did not receive a response either from 3AC’s operations team or its cofounder Kyle Davies, Yuan said. 

“Then our traders noticed that there were a few rumors circulating on Twitter speculating on 3AC’s insolvency,” Yuan said. “Since we were directly involved, we felt the need to tell the world about what had occurred and gauge the extent of the 3AC contagion,” he added.

After Yuan went public on Thursday morning, he claimed other 3AC clients reached out to 8 Blocks alleging that the hedge fund, cofounded by Su Zhu, “were leveraged long everywhere and were getting margin-called.”

“Instead of answering the margin calls, they ghosted everyone,” Yuan said. “The platforms had no choice but to liquidate their positions, causing the markets to further dump.” 

As cryptocurrencies bore the brunt of a market selloff ahead of the Federal Reserve’s interest-rate decision, a news report by The Block citing three unnamed sources said 3AC faced liquidations totaling at least US$400 million.

The crypto hedge fund is “in the process of figuring out how to repay lenders and other counter-parties after it was liquidated by top tier lending firms in the space,” the online news outlet said.

“We are in the process of communicating with the relevant parties and fully committed to working this out,” Zhu said on his verified Twitter handle. 

“If 3AC experiences a full meltdown there will likely be significant and direct consequences on the market, as it is the largest borrower from many crypto institutions of systemic importance,” Maximilian Mai, cofounder of Web3 business BerlinDAO.com, told Forkast. 

“Given what is currently happening with Celsius as well, the crypto lending market is going through some turbulent waters,” he added. “If 3AC defaults on its margin calls, this will further rock the already fragile market, with further downward pricing pressure.” 

The development comes amid a number of crises encircling the cryptocurrency industry where extreme price volatility combined with leveraged positions is fairly common. 

Earlier this week, crypto staking and lending platform Celsius Network said it was pausing user withdrawals, swaps, and transfers citing “extreme market conditions.” TRON DAO (decentralized autonomous organization) had to add US$500 million in USDC to its reserve to bolster its algorithmic stablecoin’s dollar parity, even as USDD was off its peg to the greenback for about two days.  

See related article: Crypto on a roller coaster as market braces for Fed guidance on rates

If the rumors turn out to be true, it would be a significant setback for the hedge fund that once reportedly managed US$10 billion. 3AC supported leading projects in the crypto industry such as Bitcoin, Ethereum, Solana and Avalanche.

Temperature rising

The hedge fund reportedly made big bets on Celsius Network, which faces a challenge with Lido Staked Ethereum (stETH) as the Staked ETH, a derivative of Ethereum, was trading at about 6% below Ethereum’s price. Lido Staked Ethereum has fallen nearly 40% last week, according to CoinMarketCap. 

People operating anonymous Twitter accounts alleged 3AC reportedly sold over US$40 million worth of stETH, to allegedly prevent a US$264 million loan from Aave and US$35 million from Compound from being foreclosed. A further drop in Ethereum will speed up the foreclosure, crypto analyst “Onchain Wizard” said.

“Watching the implosion of UST, Celsius, 3AC, and (hopefully not) more, all of which are opaque and trust-based, reaffirms the need for *Decentralized Finance* more than ever,” Robert Leshner, founder of Compound Labs, said on his verified Twitter handle.