FTX, Deribit, and BitMEX have all liquidated Three Arrows Capital

Following allegations that distressed crypto hedge fund Three Arrows Capital struggled to fulfill margin calls, crypto lender BlockFi acknowledged Thursday that it recently liquidated a “major client.”

CEO Zac Prince tweeted, “Recently, we exercised our best business judgment with a significant client who failed to pay its commitments on an overcollateralized margin loan. We completely accelerated the loan and liquidated or hedged all the collateral.”

Three Arrows, a huge crypto venture capital & trading fund, was liquidated by BlockFi and other top-tier crypto loan firms after they failed to top up its loan collateral, according to a Financial Times story.

Three persons familiar with the situation indicated that crypto exchanges FTX, Deribit, and BitMEX liquidated Three Arrows Capital’s positions the previous week after the crypto hedge fund known as 3AC failed to fulfill margin calls.

As a result, 3AC, based in Singapore, owes BitMEX around $6 million, according to one of the sources. Another source described the impact on FTX as “insignificant,” adding that Deribit, which counts 3AC amongst investors, has only suffered a “little” setback.

3AC has evolved into one of the largest and most well-known crypto hedge funds, founded in 2012 by classmates Su Zhu and Kyle Davies. However, 3AC took major damage when the Terra ecosystem collapsed last month, as its investment in Terra’s native luna coin plummeted to near zero.

3AC is struggling due to Terra’s downfall and the accompanying crypto market turmoil. The hedge fund, according to the Financial Times, has also failed to meet margin calls on crypto lender BlockFi. Margin calls are when an exchange requests additional funds to back a leveraged wager that has gone bad.

The exchange had liquidated 3AC’s positions, according to a BitMEX representative. They would not comment on the amount owing but stated that BitMEX’s legal department is contacting 3AC to discuss the next steps.

“This was collateralized debt with no customer cash involved,” the representative noted. “Rather than wax poetic about our low exposure and strong capital position like other brands, we will demonstrate it by providing our consumers with a dependable and liquid trading environment every day, no matter the situation,” says the company.

Deribit’s reaction

When contacted, Deribit CEO John Jansen stated, “Since February 2020, Three Arrows Capital has been a stakeholder of our parent business. Deribit has a small number of customers with a net debt to us that we assess to be potentially distressed due to market movements. We will stay financially sound, and our activities will not be harmed even if none of this debt is repaid.”

“Unless compelled by law,” an FTX spokeswoman said, the exchange does not comment on specific clients or accounts.

The fund had ended its positions at a loss without needing to be liquidated, according to a spokesman for Bitfinex, another exchange where 3AC traded. 3AC has withdrawn all of its cash off the Bitfinex platform, with no losses to Bitfinex.

3AC and its founders Zhu and Davies have yet to make a public remark about their predicament. Several others stated that they had attempted to contact them in recent days but had been unsuccessful.

“We are in the process of speaking with appropriate parties and are dedicated to sorting this out,” Zhu tweeted earlier this week.