Three Arrows Capital, CoinFLEX founders plot ‘crypto claims’ exchange

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In a story almost too stupid to invent, the disgraced founders of Three Arrows Capital (3AC) are teaming up with the principals behind the troubled CoinFLEX exchange on a new exchange focused on the claims of failed ‘crypto’ projects’ creditors.

A pitch deck recently began circulating on Twitter regarding a proposed new digital assets exchange called GTX that was looking to raise $25 million to fund its launch. The Founding Team is listed as 3AC co-founders Kyle Davies and Su Zhu and CoinFLEX co-founders Mark Lamb and Sudhu Arumugan.

For those with extremely short memorie—clearly, the primary targets of this pitch—3AC was the ‘crypto’ hedge fund that collapsed last summer after making a seriously bad bet on Terraform Labs’ wonky tokens. The contagion from 3AC’s demise contributed to the collapses of Celsius and other firms, as well as those that were deeply impacted but have yet to acknowledge that reality by filing for bankruptcy.

Davies and Zhu legged it rather than face the legal consequences of their mismanagement of 3AC, taking refuge in Dubai. Since last November’s collapse of Sam Bankman-Fried’s FTX exchange, the 3AC scofflaws have resurfaced on Twitter, apparently under the impression that SBF’s even bigger fraud made their malfeasance tolerably quaint.

CoinFLEX recently underwent a restructuring after investor Roger Ver defaulted on a $47 million debt (that ultimately rose to $84 million) when his CoinFLEX account went into negative equity. The restructuring reportedly wiped out the founders’ stakes in CoinFLEX, apparently necessitating the launch of some other venture. CoinFLEX’s chief marketing officer Leslie Lamb (Mark’s wife) is pitched as performing the same role at the new GTX.

The founders of 3AC, Zhu Su and Kyle Davis, and the two founders of CoinFlex have launched a new project, GTX, which is raising a seed fund of $25m to trade claims from creditors. Su Zhu acknowledged the news to WuBlockchain: “yes, no comment, just busy building it”.

— Wu Blockchain (@WuBlockchain) January 16, 2023

The audacity of a team with such seriously chequered histories led some to doubt the pitch deck’s authenticity. Yet Zhu confirmed its authenticity to the Wu Blockchain Twitter account, saying only, “yes, no comment, just busy building it.”

Come with us if you want to live

GTX’s pitch is that there’s a need for the “$20 billion crypto claims market” that resulted from 2022’s ‘crypto’ collapses—including 3AC’s—to “trade on a public exchange.” Those who were left hanging by these insolvencies “are stuck with illiquid/locked debt capital, which they would like to unleash.”

The pitch further surmises that “distressed funds can’t obtain the size of claims they are looking for,” while the “current process of buying & selling claims on competitor platforms is clunky, expensive and impossible for small claim holders to access.”

Among those GTX competitors is Xclaim Inc, which currently offers individuals holding seemingly worthless digital currency chits “up to 15.5%” for funds stranded on FTX all the way up to 41% for funds stranded on the bankrupt Voyager Digital. Similar offers are made by bankruptcy-focused investment banking firm Cherokee Acquisition.

GTX would unlock creditor claims against FTX, Celsius, BlockFi, Mt Gox “and more” (ahem) for “immediate trading.” The “collateral value” of these claims would be “backstopped by debt firms.” GTX users would be “eligible for pro-rata equity” in the exchange based on the size of their claims in the bankrupt entities. Creditors would have the option of continuing to “hold their claims to maturity or elect to sell them to crypto while using claims as margin capital.”

The goal here is to “fill the power vacuum left by FTX” and “appeal to the crypto trading appetite of claim holders.” By offering lower fees than the likes of Xclaim, GTX will “dominate the crypto claims market within 2-3 months of going live,” which the deck expects to occur “by end of February.”

The GTX moniker isn’t carved in stone just yet, as Zhu told the Wall Street Journal that the proposed branding’s resemblance to FTX was intended as a joke and that a real name would be finalized later this month. But many are failing to see the humor in proven scammers appearing to prey on the hopes of aggrieved customers of FTX and other frauds.

And since we are talking about cancelling stuff, if you are investing into coinflex/3ac "exchange" you might find it a bit more difficult to work with wintermute in future (on the relationship building side)

— wishful cynic (@EvgenyGaevoy) January 16, 2023

Among those firing a shot across GTX’s bow is Evgeny Gaevoy, CEO of the Wintermute crypto market-maker. In a Monday tweet, Gaevoy warned that “if you are investing into CoinFLEX/3AC’ exchange,’ you might find it a bit more difficult to work with Wintermute in future (on the relationship-building side).” Gaevoy added, “we are not going to be participating in venture rounds where these guys are about to enter the cap table, so founders beware.”

Silbert really sucks at this

Zhu told the WSJ that some 3AC creditors would be given the option of converting their claims to equity in GTX. That would indeed be a convenient way for Zhu and Davies to offload their legal responsibility, and it’s probably the only redress that creditors are likely to receive. But equity in a fantasy isn’t worth much.

Speaking of 3AC creditors, among the largest holders of worthless 3AC chits is Barry Silbert’s Digital Currency Group (DCG), which assumed $1.2 billion in liabilities held by digital lender Genesis Global Capital, a DCG subsidiary. But the promised joys of trading on GTX are specifically off-limits to “employees of listed bankrupt companies,” which, given the utter vagueness of the “and more” addendum of the companies listed in the pitch deck, likely precludes anyone to whom Zhu and Davies owe real bucks.

Interestingly enough, DCG’s ever-shrinking portfolio also includes CoinFLEX, more or less confirming Silbert’s status as a mark rather than a shrewd judge of companies and/or executives.

Evolution in reverse

Late Monday, CoinFLEX offered its own explanation of what’s going on, including the revelation that “we could rebrand CoinFLEX into this new entity.” The plan may also involve the creation of “exchanges for other asset classes which will have their own entities and brand names.”

CoinFLEX insists that the proposed GTX would offer “an opportunity to serve a large number of existing creditors,” including its own. In terms of potential benefits, “CoinFLEX creditors/Series B will be the largest class of shareholders” in this new entity, and “any funds raised will be used to grow the company and its equity value for shareholders, including the CoinFLEX creditors.”

CoinFLEX characterized GTX as “an evolution of CoinFLEX’s commitment to building open and transparent financial markets,” although transparency hasn’t always been CoinFLEX’s strong suit.

In terms of scale, CoinFLEX’s past misfires pale in comparison to the 3AC debacle. But it’s worth remembering that it was only after Ver defaulted on his obligations that CoinFLEX revealed it had allowed him to run a “non-liquidation recourse account.” This allowed Ver to avoid the traditional downsides of very bad bets, provided he offered “stringent personal guarantees” that ultimately proved worthless.

More cautious businessmen might have seen red flags in offering such privileges to a convicted felon who doesn’t believe anyone’s rules should apply to him. But hey, that’s just the kind of forward-thinking ‘fortune favors the bold’ leadership one can expect at the new GTX.

Recall that this is the same kind of ‘special designation’ that SBF granted FTX’s affiliated market-maker Alameda Research (which SBF also owned). An FTX bankruptcy attorney revealed last week that Alameda’s credit limit on FTX was a whopping $65 billion, an effectively limitless sum that allowed Alameda to continually swing for the fences without ever connecting with a profitable trade. In other words, while crypto crooks may toil under different banners, their methods are depressingly similar.

Given its model of repaying creditors in part using funds raised from new investors/marks, the GTX roadmap is almost like Enron’s Jeff Skilling collaborating with the ghost of Bernie Madoff on a plan to trade futures on the energy-generation potential of yogic flying. What could possibly go wrong?

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Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.