Frustration Turned to Anger For Creditor Who Foresaw Three Arrows Collapse

On June 14, concern among executives at crypto firm Deribit turned to frustration.

“As requested before,” Luuk Strijers, Deribit’s chief commercial officer, said in a Telegram group chat, “any sign of life would be appreciated.”

The target of Strijers’ ire was Kyle Davies, co-founder of Three Arrows Capital, the $10B crypto hedge fund that was then beginning its death spiral.

Frustration & Anger

The day before, Davies had ignored pleas from Strijers and other Deribit executives to provide a status update on a multimillion-dollar loan they’d given him, according to screenshots of the chat made public this week.

Three hours later, frustration turned to anger.

“You really need to start communicating,” another executive said to Davies. “Deribit legal team is preparing for the worst now, including [a] plan of seizure of your assets and stocks. … Don’t do anything stupid and please communicate.”

Now they’ll have to get in line.

Deribit, a crypto derivatives exchange based in the Netherlands, is one of 32 creditors named in a 1,157-page document filed in a Singaporean court as part of Three Arrows liquidation. The filing, shared on a website maintained by Three Arrows liquidators, offers the most comprehensive picture to date of Three Arrows’ collapse.

Three Arrows owes the 32 creditors at least $3.9B, according to the documents. The largest creditor is Genesis, a crypto trading and lending firm, which is out $2.36B. It loaned the money to the hedge fund in U.S. dollars, secured by shares of Grayscale Bitcoin Trust, Grayscale Ethereum Trust, and tokens for the Near and Avalanche blockchains.

But the documents offer more than numbers. They also detail the frustration and panic among the clients who trusted Davies and his Three Arrows co-founder, Su Zhu, with their companies’ assets.

Moreover, Three Arrows’ creditors doubt the co-founders are acting in good faith. In requesting the Three Arrows’ liquidation, Deribit noted it had tracked the hedge fund’s blockchain transactions.

Barriers to Recovery

In mid-June, as Davies and Zhu were ignoring creditors calls and messages, Three Arrows sent cryptocurrency worth tens of millions of dollars to unknown addresses or affiliates of the co-founders.

“It was unclear where those funds subsequently went,” said Russell Crunpler, a liquidator with Teneo, the New York-based firm assigned to Three Arrows, in the court documents. “The Company’s conduct was especially concerning given that cryptocurrency, by its nature, is difficult to secure and is difficult to recover if it has been dissipated … While the transfer of funds can be traced on the blockchain, the ease with which it can be transferred and the anonymity of wallet addresses create serious barriers to recovery.”

Perhaps most egregiously, the pair allegedly made a down payment on a $50M yacht they were to pick up this summer in Italy.

Perhaps most egregiously, the pair allegedly made a down payment on a $50M yacht they were to pick up this summer in Italy.

“It is also my understanding,” Charles McGarraugh, chief strategy officer at Blockchain.com, said in an affidavit, “that Mr. Davies intends this yacht to be larger than any yacht owned even by Singapore’s richest billionaires.”

As it happens, a three-year-old tweet of Zhu’s surfaced on Twitter in which he joked about everything that’s come to pass — insolvency, the ghosting, the liquidations, the drama.

“Climate change talk is cheap,” Zhu tweeted in February 2019, “but sailing the seven seas on your yacht as an international fugitive is expensive.”

Three Arrows did not immediately respond to a request for comment Wednesday.

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Three Arrows is a Deribit customer, borrower and shareholder, Jos van Grinsven, the company’s head of compliance, told the High Court of the British Virgin Islands in an affidavit dated June 24. Deribit did not immediately respond to a request for comment Wednesday.

On June 11, Three Arrows breached its margin requirement on a trading account at Deribit and defaulted on a loan from the company totaling 1,300 bitcoin and 15,000 ether. The two accounts were, as of June 20, worth a combined $79M, van Grinsven said.

Slowly Liquidating

Two days later, per its agreement with Three Arrows, Deribit began slowly liquidating the hedge fund’s trading account with permission from Davies and Zhu, according to screenshots of a Telegram group chat between them. The screenshots were among the hundreds of pages of evidence included in the court documents released this week.

“Shall I sell around 100btc and 1000eth a few times every hour for you?” a person going by the handle “Shaun Deribit” asked a Three Arrows employee. “Can you also get [Davies] or [Zhu] to confirm this approach?”

“Approved,” Davies responded. Then, radio silence.

Source: Court records

Several days would pass before Three Arrows’ co-founders acknowledged Deribit executives’ calls or text messages, according to court documents. To add insult to injury, Zhu took to Twitter June 14 to quell rumors he and Davies had gone AWOL.

“We are in the process of communicating with relevant parties and fully committed to working this out,” he tweeted.

That didn’t go over well with Strijers.

“We would appreciate to be included in this communication process,” he messaged Davies.

But Deribit executives weren’t the only ones who fumed over Zhu’s tweet. Charles McGarraugh, chief strategy officer at Blockchain.com, referenced the tweet in an affidavit filed June 27, also in the High Court of the British Virgin Islands. Blockchain.com did not immediately respond to a request for comment Wednesday.

“At no point has any 3AC representative attempted to engage with Blockchain.com in good faith about these issues,” McGarraugh told the court.

The two companies had a longstanding relationship — at least by the standards of the fast-moving world of crypto.

Terra Wobbled

“In 2019 (and thereafter), 3AC held itself out as, and [was] well known in the crypto industry as a leading proprietary trading fund with limited directional bias and a strong balance sheet,” McGarraugh said. “I had no reason to disbelieve this.”

Over the next four years, Three Arrows would borrow — and repay — more than $2B in crypto and fiat currency.

Things changed in May, when the Terra blockchain and its associated tokens, Luna and UST, imploded. Three Arrows had invested $600M in Terra tokens — as Davies confirmed in his own June 27 affidavit — and on the morning of May 11, as Terra wobbled, a Blockchain.com executive by the name of Scott O’Dell texted Three Arrows employee Edward Zhao to make sure everything was alright.

Zhao insisted the hedge fund would merge unscathed. Nevertheless, O’Dell wasn’t feeling lucky.

“We’ll actually have to change direction here given all the action this week and stables flows,” O’Dell told Zhao that afternoon, apparently referencing stablecoins. “We need to call back [redacted] worth of the [redacted] loan.”

Zhao’s response has, in the two days since the documents went public, become a meme.

Luna and UST would lose 99% of their value overnight.

O’Dell reached out again, this time to Davies. Davies said Three Arrows had lost money on Terra, but insisted it wasn’t fatal. He provided an emailed statement affirming this, a statement that McGarraugh says he is “now doubtful … was accurate.”

A little more than a month later, with news outlets reporting Three Arrows had missed margin calls, McGarraugh tried calling Davies, to no avail.

No Transparency

“[H]ard for us to help if we don’t have transparency on what’s going on,” he messaged Davies afterward.

The next day, he sent a Zoom link that Davies also ignored.

“Kyle we want to work with you, but very difficult when you won’t pick up,” he said.

Overwhelmed with Claims

Deribit and blockchain.com joined forces to initiate liquidation proceedings against Three Arrows in the High Court of the British Virgin Islands last month. Three Arrows did the same, saying it had been “overwhelmed with claims and/or queries from its lenders and investors.”

In his affidavit, Davies said the sequence of events was simple. With its $600M in Luna, Three Arrows was a victim of a “rapid downward spiral” that began with Terra’s implosion and “macroeconomic inflationary malaise.”

“Whilst [Three Arrows] was initially able to meet these margin calls,” he continued, “it was subsequently unable to meet all the margin calls when the lenders reacted en masse.”

‘There is no prospect of any restructuring of TACL. It is hopelessly insolvent.’

Kyle Davies in an affidavit

For a moment last week, it seemed as though the mysterious co-founders might cooperate after all. Kind of.

That morning, Zhu took to Twitter for the first time in almost a month, and shared an email that his attorney had sent Crumpler.

“Consistent with our clients’ desire to work reasonably with you, a spreadsheet with details of the company’s assets that our clients have been able to put together in this short period is attached,” the attorney, Christopher Anand Daniel, of Singapore-based Advocatus Law LLP, wrote. “In the interest of time, our clients are providing these on a rolling basis, and will continue to work on retrieving the details of other assets.”

If only.

The spreadsheet was lacking in details, according to a source familiar with the matter, who believes Zhu and Davies have been less helpful than they would like people to believe.

Nevertheless, there’s something both sides can agree on.

“There is no prospect of any restructuring of TACL,” Davies said in his affidavit. “It is hopelessly insolvent.”