The Insolvency Report: A Tale of Underestimation

In a rather disheartening 1,100-page affidavit filed by liquidator Russell Crumpler in a British Virgin Islands court, it was unequivocally stated that Three Arrows Capital (3AC) is officially insolvent. As shocking as finding a pineapple on pizza for the first time, Crumpler concluded that the management of 3AC cannot be trusted to handle their remaining assets, putting credence to the adage: ‘trust but verify’ – except, in this case, it appears verify is the more crucial part.

Remaining Assets: Are They Impaired?

The affidavit meticulously lists 3AC’s remaining assets, which include shares in the Grayscale Bitcoin Trust (GBTC), Bitcoin (BTC), Avalanche (AVAX), Near (NEAR), and—most intriguingly—shares in crypto options exchange Deribit. How much could these assets potentially be worth? Liquidators aim to tap into these to facilitate at least $2.8 billion owed to creditors. Yes, you read that right. $2.8 billion. That’s not pocket change; that’s the kind of money you wouldn’t even find under a couch cushion.

The Deribit Dilemma: Valuation Woes

Now, here’s where things get murky. Documents claim the value of Deribit shares is a whopping $500 million, which would make sense in a utopian world. However, a well-placed source has indicated the truth could be much less—around $25 million. So, how did we get here? Well, it traces back to the nifty little detail that 3AC doesn’t actually own Deribit shares directly; instead, they own them through a convoluted Singapore Special Purpose Vehicle (SPV) called 3AC QCP Deribit SPV.

A Tangled Web of Shareholding

In simpler terms, 3AC holds a 16% ownership in an SPV that owns over 23% of Deribit. Think of it as trying to sell a used car that’s stuck in a swamp—lots of ownership but little accessibility. This SPV also involves QCP Soteria Node and comes adorned with a glittering array of agreements that would make even a seasoned lawyer’s head spin.

The Encumbrance Enigma

But wait, there’s more! The structural complexities of the SPV make it hard for 3AC to liquidate shares without going through a laborious process that includes unanimous consent from its members. This means that the shares’ value is technically encumbered making them worth much less to any potential buyer. So those looking to dive into this treasure trove might just find a whole lot of paperwork and not-so-much monetary gain instead.

Your Ownership Claims vs. My Ownership Claims

And as if that wasn’t enough, there are multiple parties with side letters claiming ownership of the SPV shares that further complicates matters. Picture a pie that’s been cut into too many pieces where everyone claims to have the biggest slice. This greatly diminishes any hope for creditors to see their money again, or at least reduces the amount of frosting on that pie.

Lessons from the Collapse of 3AC

Three Arrows Capital, once a titan of the crypto hedge fund space managing over $10 billion, crumbled after making a series of ill-fated directional bets during one of the worst market downturns since 2008. There you have it: even the mightiest giants can stumble, and in the crypto jungle, it seems all that glitters isn’t gold. This case serves as a cautionary tale for investors far and wide: always know where your funds are, especially if you’re investing in something as volatile as crypto.