Sunday, February 25, 2024

The Fall of a Crypto Titan: Three Arrows Capital Founder Su Zhu Arrested in Singapore

HomeCryptoThe Fall of a Crypto Titan: Three Arrows Capital Founder Su Zhu...

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Singapore authorities have apprehended Su Zhu, co-founder of the now defunct cryptocurrency hedge fund Three Arrows Capital (3AC). Zhu was arrested on September 29th at Changi Airport while allegedly attempting to flee Singapore days after a court issued a warrant for his detention.

The 36-year-old Zhu built 3AC into a crypto behemoth managing over $10 billion in assets at its peak in 2021. However, the fund spectacularly imploded in June 2022 amidst plunging digital asset prices, wiping out investors and destabilizing crypto markets. Zhu now faces four months imprisonment for failing to cooperate with liquidators investigating 3AC’s collapse.

The rise and fall of 3AC stunned the crypto industry. Its bankruptcy filing last July sparked a chain reaction toppling other major players like Celsius Network and Voyager Digital. Millions lost their life savings in the ensuing “crypto winter.” Authorities across the globe are now zeroing in on executives behind troubled firms.

Most notably, FTX founder Sam Bankman-Fried was arrested in December 2022 and charged with orchestration of fraud. His criminal trial on 8 counts of conspiracy and money laundering charges begins October 3rd in New York. Terraform Labs CEO Do Kwon was also apprehended in September in Montenegro for alleged violations of South Korean investment laws.

Zhu’s detention follows months of alleged defiance against Singapore court orders. Investigators sought access to 3AC records and Zhu’s testimony regarding questionable business practices which may have precipitated the firm’s insolvency. However, Zhu and his co-founder Kyle Davies reportedly evaded questioning and refused to provide critical documents.

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A statement from liquidation firm Teneo revealed they will now “pursue all opportunities” to compel Zhu’s cooperation during his imprisonment. Access to 3AC financial data could help explain what doomed the company and lead to recovery of investor funds. Liquidators warn Davies also faces detention if he continues resisting inquiries.

Behind The Rise of Three Arrows Capital

Su Zhu and Kyle Davies launched Three Arrows Capital in 2012 as a traditional long-short hedge fund focused on arbitrage strategies. It pivoted to crypto assets in 2017 seizing upon Bitcoin’s meteoric price surge. By 2021, 3AC ballooned into one of the largest crypto hedge funds with offices in Singapore and Dubai.

The fund’s breathtaking growth stemmed from highly leveraged bets on volatile digital tokens. 3AC particularly specialized in decentralized finance (DeFi) platforms like AAVE and Yearn Finance. DeFi protocols facilitate lending, trading, and yield farming for cryptocurrencies outside of centralized exchanges.

At its peak valuation of $10.4 billion, 3AC managed an extensive crypto portfolio through loans from counterparties. Zhu once described their investing approach as “OCD on steroids.” He took pride in aggressively trading everything from altcoins to non-fungible tokens (NFTs).

However, its free-wheeling high-risk strategies masked a precarious house of cards. Behind the scenes, 3AC indulged in uncollateralized loans at extreme leverage levels up to 100x. When crypto markets turned bearish in May 2022, 3AC faced margin calls from creditors like Genesis Trading and BlockFi.

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The Fallout of Three Arrows Capital Collapse

With bad trades underwater and unable to meet collateral demands, 3AC filed for Chapter 15 bankruptcy on July 1st, 2022. The multibillion dollar fund had vanished within weeks amidst plunging token prices. Investigators estimate up to $3 billion of investor capital disappeared.

The firm’s failure sent shockwaves throughout crypto markets already reeling from broad sell-offs. Major lenders Celsius and Voyager also suspended redemptions and later filed for bankruptcy — partly from exposure to 3AC. Losses accelerated as interlinked companies toppled in a contagion effect.

Singapore authorities estimate 3AC’s implosion caused “unprecedented worldwide losses” nearing $40 billion. The Monetary Authority of Singapore accused the fund of fabricating its balance sheet and misleading investors. Regulators prohibited Zhu and Davies from conducting investment activities for nearly a decade.

Where Are 3AC Founders Now?

After 3AC’s unraveling, Zhu and Davies allegedly went off the grid to avoid scrutiny. While their fund sank with billions in losses, the founders continued globetrotting and living lavishly. Davies spent time in Spain and Bali, while Zhu traveled Asia playing video games.

Their carefree antics despite investors and creditors facing financial ruin sparked public outrage. Nevertheless, the pair resurfaced unapologetic in April 2022 unveiling a new NFT venture named Anthropic. But liquidators quickly sued Anthropic to block any efforts to conceal or transfer 3AC assets.

With legal troubles mounting, Zhu and Davies refused to cooperate with multiple court summons to produce documents and appear for questioning. A Singapore judge finally issued arrest warrants for the “committal” of both founders in late September. While Davies remains at large, authorities caught up with Zhu attempting to flee the country.

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What Comes Next for Su Zhu?

Zhu now faces 4 months imprisonment for failing to comply with court orders. His incarceration buys liquidators time to access 3AC financial records and interview the evasive founder. Any evidence of fraud or misconduct could extend legal ramifications beyond Singapore.

Investigators also continue tracking Davies who they warn could suffer the same fate if uncooperative. Liquidators state they will leverage “all opportunities” during Zhu’s detention and beyond to identify recoverable assets for investors. But clawing back funds after a crypto blowup is notoriously difficult.

While the founders potentially escape harsh punishment, defrauded customers must deal with devastating losses. Trust in cryptocurrency markets also wavers from this saga of greed and regulatory gaps. Lawmakers worldwide are now racing to implement guardrails to avoid similar industry catastrophes.

Zhu’s arrest marks another fall from grace for a crypto “titan” following the detention of Bankman-Fried and Do Kwon. These founders rode 2021’s crypto mania to billions in wealth before it all evaporated in 2022. Expect more legal battles ahead as governments seek justice and consumers left destitute demand answers.

For the latest updates on this evolving story, subscribe to our crypto newsletter below. We will continue monitoring Zhu’s case as well as the ongoing FTX and Terra investigations rocking digital asset markets.

Mezhar Alee
Mezhar Alee
Mezhar Alee is a prolific author who provides commentary and analysis on business, finance, politics, sports, and current events on his website Opportuneist. With over a decade of experience in journalism and blogging, Mezhar aims to deliver well-researched insights and thought-provoking perspectives on important local and global issues in society.

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