Crypto hedge fund at center of crisis faces default risk as $670m repayment deadline approaches

Billions of dollars of value have been wiped from the cryptocurrency market over the past few weeks. Companies in the sector are feeling the pain. Lending and trading companies are facing a liquidity crunch and many companies have announced layoffs.

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Three Arrows Capital, a crypto-focused hedge fund, must meet a deadline Monday to repay more than $670 million in loans or default, in a case that could have a ripple effect on the digital asset market.

3AC, as it is also known, is one of the largest crypto hedge funds and is known for its high leverage bets.

But with billions of dollars wiped out of the digital coin market in recent weeks, the hedge fund faces a potential liquidity and solvency problem.

Voyager Digital, a digital asset brokerage firm, said last week that it loaned 3AC 15,250 bitcoins and $350 million of the USDC stablecoin. At Monday’s prices, the total loan equates to more than $675 million. Voyager has given Three Arrows Capital until June 24 to repay USDC$25 million and the entire outstanding loan by June 27, Monday.

None of those amounts have been refunded, Voyager said last week, adding that it may issue a notice of default if 3AC does not refund the money.

Voyager said it “intends to pursue the recovery of 3AC” and is discussing with its advisers “the legal remedies available”.

Voyager Digital and Three Arrows Capital were not immediately available for comment when contacted by CNBC.

Voyager, which is listed on the Toronto Stock Exchange, has seen its shares fall 94% this year.

How did 3AC get here?

Three Arrows Capital was established in 2012 by Zhu Su and Kyle Davies.

Zhu is known for his incredibly optimistic view of bitcoin. He said last year that the world’s largest cryptocurrency could be worth $2.5 million per coin. But in May this year, as the crypto market began its meltdown, Zhu tweeted that his “supercycle price thesis was sadly wrong.”

The onset of a new so-called “crypto winter” has hurt digital currency projects and businesses across the board.

Three Arrow Capital’s troubles appeared to begin earlier this month after Zhu tweeted a rather cryptic message stating that the company is “communicating with relevant parties” and is “fully committed to resolving this issue”.

There was no follow-up on specific issues.

But the Financial Times reported after the tweet that US-based crypto lenders BlockFi and Genesis had liquidated some of 3AC’s positions, citing people familiar with the matter. 3AC had borrowed from BlockFi but was unable to meet the margin call.

A margin call is a situation where an investor must commit more funds to avoid losses on a trade made with borrowed money.

Then the so-called algorithmic stablecoin terraUSD and its sister token luna crashed.

3AC was exposed to Luna and suffered casualties.

“The Terra-Luna situation caught us off guard,” 3AC co-founder Davies told The Wall Street Journal in an interview earlier this month.

Risk of contagion?

Three Arrows Capital is still facing a credit crunch exacerbated by continued pressure on cryptocurrency prices. Bitcoin hovered around the $21,000 level on Monday and is down about 53% this year.

Meanwhile, the US Federal Reserve signaled further interest rate hikes in an effort to control runaway inflation, which stifled riskier assets.

3AC, which is one of the largest crypto-focused hedge funds, has borrowed large sums of money from various companies and invested in a number of different digital asset projects. This has raised fears of further contagion in the industry.

“The problem is that the value of their [3AC’s] assets have also declined massively with the market, so overall these are not good signs,” Vijay Ayyar, vice president of business development and international at Luno Exchange, told CNBC.

“What you need to see is if there are any great players left who were exposed to it, which could cause further contagion.”

Already, a number of crypto firms are facing liquidity crises due to the market crash. This month, lending company Celsius, which promised users very high returns for depositing their digital currency, suspended withdrawals for customers, citing “extreme market conditions”.

Another crypto lender, Babel Finance, said this month that it is “facing unusual liquidity pressures” and halted withdrawals.

CNBC’s Abigail Ng contributed to this report.

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