Three Arrows Capital liquidated—was it a Ponzi scheme?

Getting your Trinity Audio player ready...

News broke early this week that a British Virgin Islands court had ordered Singapore-based digital currency hedge fund Three Arrows Capital (3AC) into liquidation.

The move comes just days after Voyager Digital revealed that it had around $660 million in exposure to 3AC and was issuing a default notice against the firm.

At its peak last year, 3AC had an estimated $18 billion in assets under management. However, a recent report from FSInsight shows that all may not have been as it seemed.

FSInsight accuses Three Arrows Capital of running a Ponzi scheme

FSInsight, an independent research firm led by Tom Lee, publicly accused Three Arrows Capital of running a “Madoff-style Ponzi scheme” in a report last Friday.

In the note, FSInsight outlined how 3AC founders Kyle Davies and Su Zhu had “used their reputation to recklessly borrow from just about every institutional lender in the business,” in a trade similar to the one that sank Long Term Capital Management in 1998.

Going further, the report concluded that Zhu and Davies likely used borrowed funds to pay off the interest on loans while simultaneously “cooking the books” to show incredible returns.

While Davies acknowledged that 3AC had been “caught off guard” by the LUNA/UST crash, FSInsight believes it was a leveraged bet on the Grayscale Bitcoin Trust (GBTC) owned by the Digital Currency Group that started the firm’s unraveling.

The story is yet another example of how a fundamental misunderstanding of Bitcoin combined with a recklessly irresponsible attitude to lending lies at the heart of today’s digital currency industry.

Analysis: It’s all one big debt-ridden casino

Barely six months ago, Zhu and Davies were the darlings of the digital currency industry. Traders looking for an easy path to riches treated them like god-kings with the Midas touch. Zhu, in particular, had a massive Twitter following and an ego to match, referring to 100k ETH as “dust” in a now-infamous Tweet.

Look I couldn't let you guys jerk off watching the burn without me

Eth L1 still unusable for newcomers, show it to your grandma if you don't believe me

I'll still bid it hard on any panic dump like this weekend obv

100k eth is dust fwiw, more coming

— 朱溯 🐂 (@zhusu) December 7, 2021

As Three Arrows Capital turns to dust, Zhu would probably like to have 100k ETH at his disposal…

These days, Zhu is much quieter (he hasn’t been heard from in weeks) and perhaps a little humbler. Like many other reckless speculators in the digital currency industry, he’s finding out that delusions of mass adoption and a supercycle are just mirages based on nothing but fantasy.

In reality, serious institutions aren’t interested in buying and holding tokens like BTC and ETH that have no utility and are attached to blockchains that will never scale. While the Twitterati hang on every word spoken by the likes of Zhu and Davies, who promise them riches if they just hang on, the reality is that serious institutions have had ample time to acquire digital currencies on their books, but few of them have taken up the offer.

Why? The reason is simple; banks, investment firms, and professional investors understand that the entire premise of the digital currency industry as we know it is unsustainable. The only way to drive token prices up is to lure in new buyers or greater fools. When combined with the fact the industry is rife with scams and fraud and is held together by an offshore stablecoin (Tether) that refuses to prove real dollar assets back it. It’s not difficult to guess that the risk management teams at major Wall Street firms give the thumbs down to speculating on digital currencies.

More carnage to follow

In truth, there will be many more Su Zhu and Kyle Davies in the coming weeks and months. As firms like Celsius, BlockFi, and Voyager Digital struggle to collect the loans they made the firm, and as regulators step in to manage the chaos, rest assured that many of the other ‘crypto-kings’ will suffer a similar fate.

As it all turns to rubble, some fundamental questions about what blockchain technology is and why it has value will have to be answered. When that happens, utility blockchains like Bitcoin SV will shine.

Watch: The BSV Global Blockchain Convention panel, Blockchain Venture Investments: Driving Utility for a Better World

https://youtu.be/HNy92DwO3EY