Zhu Su Admits Three Arrows Capital May be Insolvent

Three Arrows Capital (3AC) is on the brink of insolvency after receiving margin calls on positions involving staked Ethereum (stETH) and the Grayscale Bitcoin Trust (GBTC), one of the company’s founders announced on Wednesday, and is still reportedly facing the prospect of an additional $222 million liquidation.

“We are in the process of communicating with relevant parties and fully committed to working this out,” founder and CEO Zhu Su wrote on Twitter on Tuesday evening amid rumors of the firm’s financial plight. Zhu — who is known for his optimistic posts about bitcoin on social media, including a prediction last year that it could reach a price of $2.5 million — had been uncharacteristically silent on the issue for several days prior to the announcement.

Sources who spoke with The Block on Wednesday confirmed the rumors about the firm’s insolvency, saying 3AC was “in the process of figuring out how to repay lenders and other counter-parties.” They added the company had “maintained limited contact with its counter-parties since being liquidated.”

The Dubai-based company, founded by Zhu and Kyle Davies in 2012, held up to $10 billion in assets at its peak. It isn’t clear how much of that was tied to bitcoin, which has fallen 70 percent from its peak. The firm holds investments in at least 17 additional assets, according to data-tracker Messari — including Ethereum, Polkadot, UniSwap, and Aave. Historically, it has also been a top investor for companies and projects across the industry — including crypto exchange Deribit, the DeFi protocol Orderly Network, and the play-to-earn game Axie Infinity.

Whales out here hunting 3ac’s gigantic ETH Aave position ($245 million) which has a current liquidation price of $1034

— sassal.eth 🦇🔊🐼 (@sassal0x) June 15, 2022

Rumors about 3AC’s plight began to swirl when on-chain observers noticed 3AC selling its stETH for as little as 94 percent of ETH’s value — six percent less than its theoretical peg — in order to repay loans on the decentralized Aave Protocol. The synthetic stETH is issued in exchange for staked ETH, and should theoretically hold equal value. But it has been gradually losing its peg to frantic dumping by large entities — including 3AC and the Celsius Network — seeking to maintain their liquidity. As of Wednesday, the peg stood at .93.

3AC may still face a margin call on a $184 million stablecoin loan collateralized by $222 million in Ethereum, according to analysts, who say that will occur if Ethereum falls to roughly $1,000. But some observers are skeptical about whether the addresses involved with that transaction genuinely belong to 3AC, and the company has not confirmed that report.

ETH bottomed early Wednesday at $1,014 before bouncing to a little more than $1,200 later in the day.

The firm’s potential insolvency marks the third major collapse among crypto firms in a month. The Singapore-based Terraform presided over the collapse of its $60 billion ecosystem in May after its stablecoin, UST, lost its peg to the U.S. dollar. Assets lost in that downfall included $18.7 billion in UST and $41 billion of the company’s cryptocurrency, LUNA.

Meanwhile, the London-based Celsius Network, a crypto exchange and lender, reportedly hired restructuring attorneys from law firm Akin Gump Strauss Hauer & Feld LLP this week after it froze customer withdrawals on Sunday. Observers believe the company is using the funds to defend against the liquidation of a $278 million loan — including $420 million in collateral — on the Maker Protocol. As of Tuesday, that loan faced a margin call in the event bitcoin’s price fell to roughly $15,000.

You can watch Susan Li’s Fox Business Network report about 3AC above.