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Three Arrows Capital Becomes 2nd crypto issuer Facing Insolvency

Singapore-based crypto hedge fund Three Arrows Capital (3AC) is facing insolvency issues following the extreme market condition in the crypto industry.

Reports show that the hedge fund manager has liquidated at least $400 million worth of its crypto assets to other crypto lending firms in order to cover its debts. The firm is currently in the process of repaying lenders and other counterparties.

On-chain data suggests Three Arrows Capital is selling its existing crypto positions to lower collateral requirements for certain positions. Blockchain data indicates that one of 3AC’s wallets has a debt totalling $183 million.

Since its liquidation, 3AC is said to have maintained limited contact with counterparties. However, Su Zhu, a co-founder of the firm appeared to have tried to address the issue on Twitter last morning stating: “We are in the process of communicating with relevant parties and fully committed to working this out,” he said, without mentioning specific details.

Meanwhile, the firm is said to be in the process of looking at how it can reclaim its position with lenders and other parties.

3AC’s case is similar to the case of cryptocurrency lending and borrowing platform Celsius Network, which was rumoured to be struggling with insolvency fears on June 13.

Founded in 2012 by classmates Zhu Su and Kyle Davies, 3AC is a well-known crypto hedge fund firm that has invested in several GameFi and DeFi projects. According to data analysed by analytics firm Nansen, its blockchain investments alone were worth US$10 billion during the peak market.

With investments in play-to-earn game Axie Infinity and companies such as BlockFi and Deribit, Three Arrows Capital has an extensive portfolio. In April, the hedge fund firm announced plans to move its headquarters from Singapore to Dubai.

Crypto Economy Meltdown

The recent crash in the crypto market further fueled the plight facing 3AC. Last month, the collapse of Terraform Labs’ LUNA and the de-pegging of UST resulted in massive losses for 3AC, which is a huge backer of the Seoul-based crypto firm.

Recently, Three Arrows Capital grabbed social media attention after it started dumping its staked ether (stETH), which is down nearly 40% in the last week alone. Due to the current market plunge, stETH dropped its price 7% lower than the price of ETH, a fall that has caused huge losses to some of its largest holders such as 3AC as well as embattled cryptocurrency lender Celsius Network.

Following rumours of insolvency concerns over the weekend, on Monday Celsius Network paused indefinitely withdrawals, swaps, and transfers between accounts due to “extreme market conditions.” The crypto lending firm has continued evading pressing questions about the solvency of its business and the safety of its customers’ deposits.

Celsius Denies Allegation of CEO Leaving US

Celsius Network on Monday denied reports of the CEO leaving the US, claiming that all related allegations are false.

A spokesperson from Celsius responded to Blockchain.News saying:

“Consistent with our previous messages, all Celsius employees – including our CEO – are focused and hard at work in an effort to stabilize liquidity and operations. To that end, any reports that the Celsius CEO has attempted to leave the U.S. are false.”

The crypto lender platform’s CEO Alex Mashinsky was reportedly stopped by authorities from leaving the U.S., amid insolvency rumours about his company.

Mashinsky’s failed exodus was first disclosed by crypto analyst Mike Alfred on his Twitter account on Sunday local time. He tweeted saying Mashinsky was trying “to leave the country this (last) week via Morristown Airport (in New Jersey) but was stopped by authorities.”

According to Alfred, the Ukraine-born CEO was trying to flee to Israel. However, his claims and sources have not been verified.

Alfred’s tweet also added that Mahinsky current whereabouts are unclear. Details about whether he is under custody are yet to be revealed.

The cryptocurrency loan company allows users to deposit cryptocurrency digital assets into a Celsius wallet to earn a percentage yield or take out loans by placing their cryptocurrencies as security.

Currently, the crypto market is under high volatility since the US FED’s increase in interest rates in early May 2022.

Rumours about insolvency have been floating around since Celsius decided to freeze withdrawals, swaps or transfers among all accounts in June, citing extreme market conditions. The company has repeatedly claimed that it would take time to resume its operation.

However, the company has started repaying clients to regain liquidity and re-open withdrawals. Recently, Celsius repaid interest-yielding DeFi service Compound Finance with $10 million worth of the DAI stablecoin, according to a report from Crypto Briefing.

According to a report from Blockchain.News, Celsius has also paid $53.6 million DAI in a series of transactions to its vault with Oasis Protocol, a yield-bearing DeFi platform.

Furthermore, Celsius has also stopped unaccredited investors from paying interest since April 15. Under the new plan, users with existing funds in their Earn accounts have continued to earn interests as long as the funds remain in such accounts.

The platform has recruited experts from Citigroup on possible solutions for financing options to battle insolvency fears. The Wall Street Journal indicated that Celsius has even hired consultants from advisory firm Alvarez & Marsal to seek advice or possibly bankruptcy filing.

According to a report from Coindesk, Goldman Sachs is planning on acquiring Celsius by raising $2 billion from investors.

Celsius network has over $12 billion in Assets Under Management and over $8 billion in assets lent out to investors. With the notion of bankruptcy on the horizon, Celsius Network is also acting in a way that will heighten people’s suspicion.

Meanwhile, according to a report from Washington Post, Celsius’ recent activities have also drawn regulators from at least five States, including Texas, New Jersey, Alabama, Kentucky and Washington, to investigate.

Subject to the latest rumour, Celsius’s token (CSL) has dropped to over 20%, trading at around $0.7939 during the intraday.

Celsius is "Deeply Insolvent", Says Vermont's Financial Regulator

Celsius Network is “deeply insolvent”, Vermont’s Department of Financial Regulation (DFR) said on Tuesday, adding that the cryptocurrency lender is also not honouring its obligations to customers and creditors as it does not have the assets and liquidity to do so.

The DFR also said that Celsius has been involved in an unregistered securities offering, selling cryptocurrency interest accounts to retail investors including investors in Vermont and the crypto lender also lacks a money transmitter license.

Celsius, until recently was operating largely without regulatory oversight.

The regulator said, “due to its failure to register its interest accounts as securities, Celsius customers did not receive critical disclosures about its financial condition, investing activities, risk factors, and ability to repay its obligations to depositors and other creditors.”

Furthermore, the multistate investigation of Celsius has been joined by the state agency. While, the company’s decision to suspend customer redemptions is being investigated by state securities regulators in Alabama, Kentucky, New Jersey, Texas and Washington.

Celsius had positioned itself in the market by promising more than 18% in interest to peoples’ holdings who gave it their digital coins. The crypto lender, in turn, lent those coins out, Bloomberg reported.

However, the crypto lender has already begun repaying debts as it continues tackling the potential insolvency issue.

Celsius Network on Monday repaid partial debts to decentralized finance and lending platforms Aave and Compound respectively, Blockchain.News reported citing sources.

According to tracker Etherscan, the crypto lender repaid $78.1 million worth of USDC stablecoin to Aave and $35 million worth of stablecoin DAI on the platform Compound.

The Block reported that Celsius also withdrew 6,083 wrapped bitcoin (worth approximately $124 million) from Aave and transferred them to an Ethereum address known to interact with centralized exchanges regularly.

Last month, Celsius froze withdrawals due to the recent market downturn, while other crypto firms, Voyager Digital Ltd. and Three Arrows Capital, recently filed for bankruptcy.

According to a report from Blockchain.News, besides clearing debts, the crypto lender has also started the restructuring process.

Celsius has hired new lawyers to advise the troubled cryptocurrency lender on restructuring, according to a report from the Wall Street Journal (WSJ).

The much-needed restructuring plan has come as it seeks to escape the recent turmoil in crypto markets, the WSJ said, citing people familiar with the matter.

According to the WSJ report, Kirkland & Ellis LLP lawyers have been called on board to advise Celsius on options, including a bankruptcy filing.

KuCoin CEO Clarifies Insolvency Rumours as FUD Spreads

KuCoin Exchange’s Chief Executive Officer, Johnny Lyu, has continued to dispel all rumours that the trading platform is turning insolvent.

The rumours emanated from a now-deleted Twitter account with the name Otteroooo, claiming he had insider information about the exchange’s ongoing woes.

Otteroooo operates more like a whistleblower to alert users to companies’ struggles in the Centralized Finance (CeFi) ecosystem. It acquired a massive following up until it deleted the account.

Per the whistle blown on KuCoin, he calmed the exchange does not have the liquidity issue that it can use to process customer redemption as it concerns its exposure to the Terraform Labs ecosystem tokens LUNC and wLUNC.

In a blog post with evidence of the conversations between himself and Otteroooo, Lyu explained that the only exposure that KuCoin has to the LUNA ecosystem tokens is because it supports the trading of those coins.

“It is our responsibility to keep them secure and make sure users can always withdraw in full whenever they want. Having a LUNC wallet does not necessarily mean KuCoin as a company is holding lots of LUNC tokens, and I’m sure the difference is obvious,” the blog post clarified.

The digital currency ecosystem is now very sensitive to news of insolvency after the likes of Celsius Network, Voyager Digital, Babel Finance, and the likes shut down withdrawals, locking billions of dollars in collective funds belonging to clients. As a trading platform, KuCoin is bound to have much more user’s funds as deposits, and investors will want to avoid a situation where they are cut unable to access their funds.

While the FUD also suggested that the latest $10 million in strategic investment received by KuCoin from Susquehanna International Group is an attempt by the trading platform to cover its basis, Lyu has reiterated that there is no connection between the funding acquired and its insolvency concerns.

SBF Denies Insolvency Rumours of FTX, FTT Token Slumps Over 6% during Intraday

FTX CEO Sam Bankman-Fried tweeted Monday, claiming that “FTX is fine. Assets are fine.” However, FTT, the native token of the crypto exchange FTX, its price has slumped over 24 % over the 24 hours; dropped over 6% during the intraday of Hong Kong time.

“FTX has enough to cover all client holdings. We don’t invest in client assets (even in treasuries). We have been processing all withdrawals and will continue to be,” said Bankman-Fried on his Twitter, trying to boost the confidence towards his investors as the speculation mounted over the weekend about the solvency of billionaire Bankman-Fried’s FTX crypto exchange.

The CEO made a move after he disclosed the health of FTX’s balance sheet—a warning he has learned from the Terra luna meltdown.

On Monday, Binance CEO Changpeng Zhao shocked the crypto community with the exchange’s move to liquidate its holdings of FTX’s cryptocurrency FTT, a rival to Binance’s own much larger BNB stablecoin. Blockchain.News reported the matter.

While CZ did not specify the value of the FTT cryptocurrency he planned to offload, he confirmed via Twitter that almost $600 million of FTT was transferred from a wallet to Binance’s exchange as “part of” Binance’s FTT exit.

CZ posted to Twitter on Sunday that liquidating FTT is just post-exit risk management, learning from luna. CZ said, “Due to market conditions and limited liquidity, we expect [the sale of Binance’s FTT] will take a few months to complete,” adding that the sale would be done in a way that “minimizes market impact.”

“I’d love it if we could work together for the ecosystem,” Bankman-Fried said in his tweet on Monday, referring to Zhao.

Following its collapse, Celsius has been accused of artificially inflating its balance sheet by manipulating the price of its cel cryptocurrency.

Last week, the crypto blog Dirty Bubble Media drew parallels between Sam Bankman-Fried’s trading company Alameda Research and the bankrupt crypto lender Celsius after media reports alleged that Alameda’s balance sheet is being used by FTX to boost its native token, FTT.

Yesterday, Caroline Ellison, CEO of Alameda, hit back against CZ’s suggestions, telling him that if he is looking to minimize the market impact on his FTT sales, then Alameda would happily buy it all from him at $22. Ellison then posted that Alameda’s reported balance sheet is “for a subset of our corporate entities”, and the company has more than “$10 billion of assets that aren’t reflected there.”

Crypto Community Raises Concerns

The drama has caused anxiety among the crypto community members who fear the industry will be hard hit by another Terra luna crash or Celsius-style meltdown after the stablecoin reserves on the exchange dropped significantly over the last 24 hours.

Yesterday, CryptoQuant data indicated that the FTX stablecoin reserve is currently at $107 million, an improvement after it dropped by 93% over the last two weeks to $51 million earlier.

The increased reserve was because Alameda Research sent stablecoins from Circle and other exchanges to FTX. Alameda is a crypto trading firm owned by FTX founder Sam Bankman-Fried.

On-chain analyst Lookonchain also stated that Alameda has withdrawn $487 million USDC from Circle and transferred it to the FTX exchange since November 3. It also withdrew more than $197 million USDC from Circle after CEO Caroline Ellison said the trading company was willing to purchase Binance’s FTT for $22 each.

Furthermore, Chinese crypto reporter Colin Wu reported that firms like Jump crypto and Nexo had made huge amounts of withdrawals from FTX over the last 24 hours.

Lookonchain reported that such a wave of withdrawals has made FTX’s hot wallet value drop to $1.8 billion from $2.4 billion in the last 24 hours.

Crypto influencer and founder of crypto banter Ran Neuner also informed his followers to withdraw their funds from FTX while noting that he has nothing against the exchange. Ben Armstrong (BitBoy Crypto) also urged people to close their FTX accounts without saying that the exchange was insolvent.

But Gabriel Shapiro, the general counsel at blockchain researcher Delphi Labs, tweeted that [It] feels like people want FTX to be insolvent and are trying to cause a bank run. [It] would be another major political [and] regulatory black eye for the industry—can we not?”Meanwhile, Bankman-Fried has emphasized that all is well with the FTX exchange. He tweeted that the exchange had already processed billions of dollars of deposits/withdrawals yesterday and said it would keep doing so. He added that the exchange would welcome users who withdrew their funds when all these blow over.

FDIC Requires Potential Buyers of Failed U.S. Banks to Give Up Crypto Services

The Federal Deposit Insurance Corporation (FDIC) has requested banks interested in acquiring failed U.S. lenders, such as Silicon Valley Bank and Signature Bank, to submit their bids by March 17. The authority has also requested potential buyers to be banks with an existing bank charter, prioritizing traditional lenders over private equity firms. If the whole company sales do not happen, the FDIC may consider offers for parts of the banks. However, the FDIC has required any buyer of Signature Bank to agree to give up all cryptocurrency business at the bank.

New York-based Signature Bank is a crypto-friendly bank in the United States and is known for its many partnerships in the crypto industry, including Coinbase exchange, Paxos Trust, BitGo, and Celsius, among others. However, the FDIC’s request to give up all cryptocurrency business may impact Signature Bank’s reputation in the crypto industry.

The news comes amid concerns expressed by U.S. Representative Tom Emmer, who wrote a letter to the FDIC expressing his concerns that the federal government is “weaponizing” issues around the banking industry to go after crypto. Emmer believes that such actions to weaponize recent instability in the banking sector are inappropriate and could lead to broader financial instability.

New York regulators closed down and took over Signature Bank on March 12, appointing the FDIC as the receiver. To protect depositors, the FDIC transferred all the deposits and most of the assets of Signature Bank to Signature Bridge Bank, a full-service bank that will be operated by the FDIC as it markets the institution to potential bidders. However, according to Barney Frank, a former member of the U.S. House of Representatives, New York regulators closed Signature Bank despite no insolvency. Frank speculated that the action was to demonstrate force over the crypto industry, being a “very strong anti-crypto message.” The bank has also reportedly been investigated for alleged money laundering.

The FDIC has previously stated that it does not prohibit or discourage banking organizations from providing banking services to customers of “any specific class or type, as permitted by law or regulation.” However, the FDIC’s request for potential buyers of Signature Bank to give up all cryptocurrency business may suggest a shift in the regulator’s stance towards crypto.

In conclusion, the FDIC’s request for potential buyers of failed U.S. banks to give up all cryptocurrency business may have implications for the future of the crypto industry in the United States. It remains to be seen whether other regulators will follow suit in restricting crypto services in the banking industry.