The Collapse of Three Arrows Capital: A Wake-Up Call for the Cryptocurrency Industry

In the year 2022, Three Arrows Capital (3AC), which had previously been a well-known brand in the bitcoin hedge fund industry, was confronted with a catastrophic failure. This decrease was not simply a single occurrence; rather, it was a trigger in a chain of domino events that occurred, which caused the cryptocurrency market to be shaken. The court in the British Virgin Islands has taken quick action by freezing assets associated to the fund’s founders, Su Zhu and Kyle Davies, as well as Davies’ wife, Kelly Chen, with a potential value of up to $1.14 billion.

Mismanagement and excessive exposure to the unpredictable cryptocurrency market are the core causes of the collapse that occurred at 3AC. It is alleged by liquidators from Teneo that the conduct of the fund’s founders rendered the fund extremely susceptible to swings in the market, so wiping its capital buffer against an astounding $3.3 billion in liabilities. In the aftermath of the collapse of Terra in 2022, which triggered a chain reaction of ramifications among the business, this vulnerability became more obvious.

The collapse of 3AC has ramifications that go beyond the financial damages that it has caused. Founders Zhu and Davies are now being investigated by the legal system, with Zhu being subjected to in-depth interrogation in a court in Singapore over the collapse of the fund and the locations of its assets. The arrest of Zhu at Changi Airport in Singapore and the subsequent interrogation of him highlight the need of effective worldwide coordination of regulatory activities. As a response, Singapore has prohibited Zhu and Davies from participating in any activity that is regulated within its jurisdiction. This action reflects a growing worldwide agreement on the increasing need of implementing rigorous regulations around cryptocurrencies.

There have been extensive repercussions for the cryptocurrency industry as a result of the breakdown of 3AC. The cryptocurrency market had a major decline of $2 trillion as a result of its contribution, which in turn triggered a number of subsequent crashes within the industry. As a result of this occurrence, the fragility and interconnection of the cryptocurrency market have been brought to light, highlighting the need for more strong regulatory frameworks and risk management methods.