Last week saw one of the two co-founders of the now-defunct crypto hedge fund Three Arrows Capital (3AC) arrested in Singapore. With the man in question Su Zhu (SZ) now being detained, relevant authorities are now hoping to garner more momentum regarding the company’s industry-shaking liquidation process. 

In this article we’ll explore the timeline behind 3AC’s almighty July 2022 collapse, as well as how it led to the pair of co-founders now facing interest from incarceration entities. 

Three Arrows Capital- The Beginnings 

3AC was founded back in 2012 by Kyle Davies and SZ - two former classmates that had both worked in TradFi roles across Asia. Despite its first office being in the pair’s living room in their San Francisco apartment, the company was founded with a healthy $1.2 million worth of capital at its backing.

With an initial focus on trading traditional emerging currencies, 3AC’s promising nascent developments were illustrated through the 30+ hires it made within the first 3 years of activity. 

The company’s big pivot into crypto came in 2017, with SZ citing the ‘calibre and energy of young people involved in the space’ as the inspiration behind the move. With efforts gradually being pushed in the direction of Bitcoin (BTC) and Ethereum (ETH) derivatives trading, DeFi became the firm’s main focus come 2018. 

Here, it began investing in equity rounds for a whole myriad of crypto companies such as Layer-1s, Web3 gaming, DeFi projects, and more. In turn, Davies’ and SZ’s stand-out reputations across the space allowed 3AC to enjoy many early round investments, which further helped them build a seemingly diverse and strong portfolio. 

Such strong reputations were cultivated through the duo’s active roles across ‘crypto Twitter,’ which saw transparent 3AC updates and the occasional ‘shit post’. Additionally, SZ correctly called the bottom of the 2018 bear market - where because of coherent investments, the company saw huge profits once the following bull run came around.  

That being said, the first glimpses of the company’s illegitimate activities arose when it became apparent that Davies and SZ were often engaging in psychological operations (PSYOP) - where for example, the company bought 156 ETH despite SZ stating that he was ‘abandoning’ the project just days before. 

Anyhow, by as late as March 2022, 3AC had amassed assets under management worth a whopping $10 billion. As it was later revealed, 3AC’s strategy for achieving such feat involved borrowing money from industry partners and investing it in more nascent and unproven Web3 projects. 

The 3AC Crumble

As those who were involved in crypto antics back in spring 2022 may know, 3AC’s tumble was initiated by the collapse of terraUSD (UST) - i.e. the failed stablecoin that it had significant investments in. 

For context, UST was part of the Terra crypto ecosystem (the third-biggest of its kind at the time), which collapsed across a three-day period in May 2022 (wiping-out its $50 billion valuation). 

Before its demise, Terra Luna founded the Luna Foundation Guard (LFG) as a mechanism for bolstering UST’s peg with the US dollar. Largely through investments from 3AC, the LFG raised over $1 billion in Bitcoin, which was exchanged for the same amount of its sister (and now-collapsed) LUNA token.

Further, 3AC was reported to have bought 10.9 million locked LUNA for almost $560 million… an investment which later (essentially) zeroed. 

Although Davies claimed that 3AC had weathered its LUNA losses, the knock-on effects and emergence of today’s ongoing bear market began catalysing the company’s eventual demise. 

Two other trades are also attributed big-blame in the fall of 3AC, with the first being the company’s large investments in Greyscale’s Bitcoin Trust (GBTC - which was one of the first institutional products of Bitcoin). 

With the uprise of other products of the ETF accord, the arbitraged-premiums 3AC was receiving from its services soon turned into discounts. As we see today, such dynamic eventually prompted Greyscale to look in different directions regarding the future of GBTCs - with the proposed conversion into a spot Bitcoin ETF being the outcome. 

Anyhow, 3AC maintained its unblinkered focus on GBTCs due to the belief that the arbitrage discounts will eventually revert back to being premiums. Further, such outlook formed the premise of many investor pitches (focused arbitrage opportunities involving GBTC) from 3AC’s investment arm TPS Capital.

This operation eventually backfired, as through experiencing continuous losses from its premiums-turned-discounts, 3AC eventually sold the entirety of its GBTC holdings. Although the precise reason behind this remains ambiguous (as there’s no on-chain record), many assume that this took place due to mass investment margin calls asking for liquidations. 

Alternatively, it could’ve been caused by an on-chain long bet in which 3AC placed on staked Ethereum (stETH) - as around the same time, such asset began falling in value relative to its ETH counterpart, causing mass liquidations (from the likes of FTX’s Alameda Research of all parties) and imbalances across the Ethereum hodling ecosystem.  

With this in mind - and just days after SZ made a stETH-bullish tweet - 3AC converted 22,000 stETH into ETH (…another desperate PSYOP attempt?). 3AC’s stETH antics marked another eyebrow-raising moment in the company’s demise, with the days following revealing even more about its gloomy position.   

With Bitfinex leaderboards broadcasting 3AC’s losses to the masses, the company’s rampant leverage-focused activity post LUNA collapse came to surface. Further, as a lot of 3AC’s risky leveraged positions were made via borrowed funds, the company had essentially compounded its losses and dug itself an even deeper hole. 

Additionally - and just as worryingly for investors - Davies and SZ had gone silent on socials, whilst also ‘ghosting’ internal team members and external counterparties.  

In turn, it was eventually revealed that instead of being a legitimate company with a sound investment portfolio, 3AC was more of a degen-like yield farm that was biting off more than it can chew. 

Such consensus was found after clients such as Avalanche (AVAX) and dYdX reported that 3AC essentially offered ambiguous ‘treasury management services’ that were designed for cultivating yields on clients’ funds. 

Further, in addition to the money in which 3AC was losing for clients, the more-pressing matter of whom the company was exposed to needed exploring. This is because 3AC had taken-out massive loans from crypto lenders that couldn’t be paid back, whilst also having trading accounts on numerous exchanges that needed to be liquidated. 

June 2022 then saw the likes of BlockFi and Genesis announce that they had ‘liquidated the collateral of a trading partner’ (without naming any names), whilst Bitmex, Deribit, and Finblox also disclosed their unfortunate involvement in 3AC’s debauchery.

On 2 July 2022, 3AC officially filed for Chapter 15 bankruptcy to protect its US assets from creditors. The firm's CEO Stephen Ehrlich attributed the decision (in part) to the company’s inability to pay back its loan from Voyager.

For context, Voyager is a digital asset brokerage firm that filed for Chapter 11 bankruptcy protection after 3AC couldn’t pay back the roughly $670 million it had borrowed. Other significant victims of the case include Blockchain.com - which reportedly faced a $270 million hit from its defaulted 3AC loans -  as well as former crypto lending platform Celsius which also filed for Chapter 11 bankruptcy protection in July 2022. 

Post Bankruptcy Filing 

With many of its investments coming in early stages that involved locked-for-vesting tokens, 3AC’s Teneo-led liquidation process came with a whole host of complications (many of which leading to missed margin calls for creditors). 

And as for its co-founders, SZ and Davies both went missing after the bankruptcy filing, with their representative stating that their disappearances were efforts to avoid ‘physical violence’ threats from liquidators. 

With little shame, the pair also went on to found the ‘Open Exchange’- a ‘public marketplace for crypto claims trading and derivatives’ whose native OX ($OX) coin has plummeted in wake of SZ’s arrest. 

Su Zhu's arrest led to a 50% drop in $OX. After 3AC's $10B bankruptcy, founders Su Zhu & Kyle Davies started the Open Exchange, evading creditors. The Tie Terminal reported this just before markets reacted, underscoring the need for swift info in the dynamic crypto world. pic.twitter.com/EKaObOtJxb

— The Tie (@TheTieIO) September 29, 2023

In turn, Singapore’s central bank later banned the duo from ever managing, directing, or becoming a shareholder ‘of any capital market services firm’ in the region for the next nine years. 

On an industry level - and as we’ve since learned again through the fall of FTX - the 3AC debacle was another shining example of how vastly exposed and interconnected the crypto space really was/is. 

Su Zhu’s Arrest 

Over a year on from its bankruptcy filing, 3AC hit headlines last week when SZ was arrested in Singapore’s Changi Airport whilst attempting to leave the country. 

Here, Teneo had received a committal order against Zhu after he failed to comply with a court order that required him to cooperate throughout the liquidation process. More specifically, the order instructed Singaporean police to arrest Zhu and hold him in custody for four months (with a ‘similar’ committal order also being out there for the Davies). 

Whilst SZ is in Singaporean custody, Teneo said it will engage in matters that focus ‘on the recovery of assets that are either the property of 3AC or that have been acquired using 3AC’s funds’ - where in doing so, it will ‘pursue all opportunities to ensure Mr Zhu complies in full with the court order’. 

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This article is intended for educational purposes and is not financial advice.