Contagion Risks Rise as Three Arrows Capital Defaults on $670 Million Loan

Three Arrows Capital
Three Arrows Capital Defaults on $670 Million Loan, Heightening Contagion Risks

Cryptocurrency brokerage firm Voyager Digital has issued a notice stating that prominent crypto hedge fund Three Arrows Capital has defaulted on a loan worth more than $670 million. The loan consisted of $350 million in USDC and 15,250 BTC.

Three Arrows Capital was founded in 2012 by Zhu Suand and Kyle Davies, two founders well-known for being bullish on the cryptocurrency space. Zhu had personally stated BTC could trade at $2.5 million per coin, but as the market meltdown started earlier this year he said his “supercycle price thesis was regrettably wrong.”

Amid a renewed cryptocurrency winter, Three Arrows Capital has defaulted on its loan with Voyager and is said to have been liquidated by other lenders, including BlockFi and Genesis. Voyager is moving to recover funds from the hedge fund, but in the meantime, it’s struggling to stay afloat.

The broker noted that it continues to operate and fulfill customer orders and withdrawals as it’s seemingly surviving contagion fears. Its CEO Stephen Ehrlich was quoted saying:

“We are working diligently and expeditiously to strengthen our balance sheet and pursuing options so we can continue to meet customer liquidity demands.”

The company has said it had around $137 million in cash and crypto assets, while having access to a $200 million cash and USDC revolver, as well as a 15,000 BTC revolver provided by Alameda, the quantitative trading firm of FTX CEO Sam Bankman-Fried. The company committed $500 million in financing to Voyager Digital, which has already pulled $75 million from those funds.

Crypto Contagion Risks

Three Arrows Capital’s situation started looking grim after the Terra ecosystem collapsed, and both LUNA and its native stablecoin UST became nearly worthless. The company is said to have had exposure to the ecosystem and suffered heavy losses because of its collapse.

One of the company’s co-founders said earlier this month on social media Three Arrows Capital is “in the process of communicating with relevant parties” and is “fully committed to working this out.” As mentioned, it has been liquidated by BlockFi and Genesis, and is now under pressure to repay Voyager anything it can.

Speaking to CNBC Vijay Ayyar, vice president of corporate development and international at crypto exchange Luno, noted that it remains to be seen whether there are large players in the space that had exposure to Three Arrows Capital and could soon be underwater as well.

Three Arrows Capital defaulting on its loan with Voyager and the brokerage requiring a $500 million line of credit from Alameda also shows that large players in the cryptocurrency market may be more of a curse than a blessing.

While large entities buying a crypto asset can easily help its price surge, if they fail to meet their financial commitments the lenders themselves end up in hot water as they scramble to figure out how to survive not having such a large amount of funds.

Notably, decentralized finance platforms like Compound require borrowers to overcollateralize their loans, ensuring they can be forced to liquidate if they fail to answer their margin calls. During periods of extreme market conditions, these platforms simply liquidated borrowers and halt contagion before it was able to spread.