Deribit claims crypto hedge fund Three Arrows failed to repay $80mn

Three Arrows Capital fell into liquidation this week after exchange Deribit claimed the crypto hedge fund failed to repay $80mn, highlighting the severity of the crunch at the prominent digital asset investment company.

The investor allegedly failed to reimburse the funds after derivatives venue Deribit unwound Three Arrows’ positions to meet a margin call prompted by last month’s digital asset market turmoil, according to court filings in the British Virgin Islands.

The claims underscore the extent to which Three Arrows used borrowings to boost its wagers on the cryptocurrency market. BlockFi and Genesis, two major crypto financial services groups, had also liquidated some of Three Arrows’s positions last month after it failed to meet margin calls when its bets turned sour.

Three Arrows was one of the most active players in the broader industry and was a shareholder in Deribit, according to the exchange. The investment group’s troubles have intensified the credit crisis in the digital asset market.

The court documents filed by Deribit claim that Three Arrows had borrowed bitcoin and ether from the derivatives exchange in March 2020, at the depths of the pandemic. On June 11 2022, as cryptocurrency prices tumbled, Three Arrows breached Deribit’s loan stipulation to have a minimum balance in its account.

Two days later Deribit began to liquidate Three Arrows’ positions and on June 15 it terminated the lending agreement and demanded payments of the outstanding loans, interest and negative asset value of the account, the court documents say.

As of June 20, that amounted to $80.13mn, the documents showed. That consisted mainly of 1,300 bitcoin and 15,000 ether in the loan, valued at around $42mn, and negative asset values of $37.1mn. 

Deribit pushed for Three Arrows to be liquidated as “the company is or is likely to become unable to pay its debts as they fall due, and is therefore insolvent”, the court filing said.

Advisory firm Teneo was appointed as joint liquidator of Three Arrows in the British Virgin Islands earlier this week following Deribit’s claims.

Three Arrows and Deribit did not respond to requests for comment. Deribit tweeted last month that due to “market developments”, it had a “small number of accounts that have a net debt to us that we consider as potentially distressed”. Su Zhu, Three Arrows co-founder, tweeted in June that “we are in the process of communicating with relevant parties and fully committed to working this out”.

Three Arrows is also under scrutiny by the Singapore financial regulator, which earlier this week reprimanded the fund for providing misleading information, as well as for breaching an asset under management threshold. The Monetary Authority of Singapore said it had been investigating the fund, which was initially managed from the city state before it shifted to the British Virgin Islands, in September 2021.