Mission impossible: Recovering 3AC’s missing assets

When DRB Panama first filed a suit against Three Arrows Capital (3AC), few people thought its claim would throw the massive hedge fund into a death spiral or kick-start a global hunt for hidden assets.

After all, 3AC was a giant, with assets estimated at US$10 billion, according to crypto intelligence firm Nansen. DRB Panama, the operations arms of dutch crypto exchange Deribit, was only seeking US$80 million.

But DRB was just the first in line at the courthouse. Other creditors quickly joined the suit, and it soon became clear that 3AC owed almost US$3.4 billion. To make it worse, the paper trail for the firm’s once incredible portfolio reads like a giant edition of Where’s Waldo?

“It’s going to be incredibly difficult to get a complete inventory of all the assets they had, what they still have, and where the balance has gone,” says Thio Shen Yi, a senior counsel at the Supreme Court of Singapore and a joint managing partner at TSMP Law Corporation. Thio’s law firm is not directly involved in the liquidation proceedings but has previous experience with clients who were aiming to recover crypto assets.

3AC’s problems started on May 10, when it lost over US$600 million in the collapse of TerraLab’s UST and Luna tokens, according to court documents. But unknown to most at the time was how 3AC had also taken massive loans using cryptocurrencies as collateral. As the chaos from the Terra collapse spread and token prices fell, lenders demanded margin calls.

Those calls went unanswered, and eventually, over US$400 million in 3AC assets were liquidated to pay off lenders. The hedge fund was facing insolvency. The company allegedly stopped communicating with its creditors, according to several affidavits filed in the suit. Crypto transactions also began to appear on several wallets associated with 3AC, prompting one lawyer for DRB Panama to write that he was “unable to identify where the Company’s funds have gone and for what purposes the Company’s funds have been transferred.”

“Instead of answering margin calls, [the company] ghosted everyone. The platforms had no choice but to liquidate their positions, causing the markets to further dump,” said 8 Blocks Capital CEO Danny Yuan in a Fortune article.

Tracking down the pieces

DRB Panama filed the suit against 3AC at the end of June. It went to court in the British Virgin Islands (BVI), where 3AC has been registered since 2012. In under two weeks, the court decided that the crypto hedge fund’s liabilities far exceeded its assets and ordered the company liquidated.

The first thing lawyers had to do was identify what remained of the company’s assets and sell them off. These proceeds are then used to pay creditors, usually netting them pennies on the dollar and helping them pay off legal fees.

But 3AC’s situation isn’t your run-of-the-mill bankruptcy case. According to lawyers that Tech in Asia spoke to, this is the first major liquidation involving massive volumes of cryptocurrencies.

The job of finding 3AC’s crypto assets fell to Christopher Farmer and Russell Crumpler, both from the BVI offices of advisory firm Teneo, who were appointed as liquidators. Tech in Asia reached out to Teneo for comment but did not get a response.

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