Three Arrows Capital (3AC) Collapse
June–July 2022 — Singapore-based crypto hedge fund defaults on ~$3.5B; ordered into liquidation; founders flee.
Three Arrows Capital (3AC) was a Singapore-based crypto hedge fund founded in 2012 by Su Zhu and Kyle Davies. At peak in 2021, 3AC managed approximately $10B in assets across long-only crypto positions, GBTC (Grayscale Bitcoin Trust), Luna Foundation Guard reserves, and DeFi positions. The fund was widely regarded as one of the most-sophisticated and best-capitalised crypto-native funds and had borrowed heavily from major crypto lenders including Voyager, Genesis, BlockFi, and Celsius.
The Terra/Luna collapse in May 2022 was the immediate trigger for 3AC's failure. 3AC held substantial LUNA / UST exposure and was a major participant in the LFG reserves that backed UST. The collapse of UST and LUNA destroyed several billion dollars of 3AC's marked value within days. Combined with margin calls on the firm's broader leveraged positions, 3AC was unable to meet creditor demands.
On June 27, 2022, a British Virgin Islands court ordered 3AC into liquidation. The fund's bankruptcy proceedings revealed approximately $3.5B in unsecured loans that 3AC had defaulted on, distributed across multiple major crypto lenders. The collapse was the proximate trigger for the subsequent Voyager, Celsius, BlockFi, and Genesis bankruptcies — each of which had substantial unsecured exposure to 3AC.
Timeline
- 2012Three Arrows Capital founded in Singapore by Su Zhu and Kyle Davies.
- 2021-Q43AC at peak with ~$10B AUM; substantial GBTC, LUNA, and DeFi positions; widely cited as sophisticated and 'safe' counterparty.
- 2022-05-09Terra/Luna collapse begins; 3AC's LUNA position and LFG-related positions destroyed within days.
- 2022-05-25Su Zhu and Kyle Davies stop responding to creditor inquiries; communications go through legal counsel only.
- 2022-06-13Margin calls mount across 3AC's leveraged positions; the firm cannot meet them.
- 2022-06-148 Blocks Capital publicly accuses 3AC of failing to return its capital.
- 2022-06-15Multiple major lenders (Voyager, Genesis, BlockFi) disclose substantial 3AC exposure.
- 2022-06-27British Virgin Islands court orders 3AC into liquidation.
- 2022-07-013AC files Chapter 15 in US Bankruptcy Court for Southern District of New York to coordinate with BVI proceedings.
- 2022-07-06Voyager files Chapter 11 citing 3AC default as primary trigger.
- 2022-09-30Liquidators file motions to depose Su Zhu and Davies; both are deemed uncooperative.
- 2022-12Su Zhu and Davies confirm via interviews they have left Singapore; their whereabouts are unclear.
- 2023-09Su Zhu arrested in Singapore for failing to cooperate with liquidators; ordered to serve a contempt sentence.
Mechanism
The leveraged-bet model. 3AC operated as a directional long-crypto fund with substantial leverage applied across its positions. Borrowings came from major crypto lenders on largely unsecured terms — the lenders extended credit based on 3AC's reputation, prior performance, and reported balance sheet rather than against specific posted collateral. This unsecured-credit structure, common in pre-2022 crypto lending, meant lenders had no liquidation mechanism when 3AC's positions deteriorated.
The Terra/Luna exposure. 3AC was a major participant in the LFG (Luna Foundation Guard) BTC reserves backing UST. When UST began to depeg in May 2022 and LFG sold its BTC reserves attempting to defend the peg, 3AC's positions in both LUNA and the underlying LFG arrangement were destroyed. Subsequent reports indicated 3AC had also taken substantial leveraged LUNA-long positions outside the LFG structure.
The GBTC arbitrage. 3AC was one of the largest holders of Grayscale Bitcoin Trust (GBTC) shares, accumulated via a strategy that depended on GBTC trading at a premium to NAV — the prevailing condition through 2020 and most of 2021. When GBTC began trading at a substantial discount in late 2021 and into 2022, the holdings produced large marked-to-market losses with no liquidation path (GBTC shares could not be redeemed for the underlying BTC under the trust's structure).
The contagion mechanism. 3AC's borrowings were spread across multiple major crypto lenders without coordination between lenders. When 3AC defaulted, each lender faced an unsecured claim against a fund in BVI insolvency proceedings, with no priority over other creditors and no recoverable collateral. The same default event simultaneously stressed every major crypto lender — producing the cascade through Voyager (July 6), Celsius (July 13), BlockFi (November 28), and Genesis (January 19, 2023).
The founder behaviour during collapse. Court documents and creditor filings describe Su Zhu and Kyle Davies as having stopped cooperating with creditors and liquidators by late May 2022 and as having physically left Singapore by mid-2022. The cooperative-debtor behaviour expected in normal insolvency proceedings was absent; substantial portions of 3AC's asset whereabouts remained difficult for liquidators to trace through 2023-2024.
Impact
3AC's collapse was the trigger event for the broader 2022 crypto-lender contagion. Voyager (which had $670M exposure to 3AC), Celsius, BlockFi (which had ~$80M exposure to 3AC after a partial liquidation), and Genesis all subsequently failed in part due to losses on 3AC exposure. The structural lesson — that unsecured-credit lending to crypto-native counterparties is fragile to correlated market events — substantially reshaped post-2022 crypto-lending standards. The crypto-credit market materially contracted; post-2022 lending now generally requires posted collateral with daily mark-to-market, eliminating the unsecured-credit model that had dominated the prior cycle.
Operational lessons
- 1Unsecured credit to crypto counterparties is correlated risk. Lending to 3AC, Celsius, Voyager, BlockFi, and Genesis simultaneously failed in the same correlated event. The structural issue was the unsecured-credit model, not any single counterparty's quality.
- 2Reputation isn't risk management. 3AC was widely cited as the most-sophisticated crypto fund through 2021. Reputation provided no protection when the underlying directional bets failed; lenders relying on reputation rather than collateral were wiped out.
- 3Fund failures cascade through their counterparty stack. Identify a leveraged crypto fund's counterparties (lenders, market makers, OTC desks) — a fund failure radiates outward through every entity that had unsecured exposure.
- 4Founder cooperation in insolvency matters. The 3AC liquidation has been substantially impaired by Su Zhu and Davies's non-cooperation; substantial portions of asset whereabouts remain unrecovered. Counterparty diligence should include considering the legal jurisdiction's enforcement of cooperation in stressed scenarios.
- 5The 'GBTC premium' was always vulnerable. Strategies that depended on GBTC trading at a sustained premium to NAV were always at risk to the eventual closing or inversion of the spread. GBTC's pre-2021 premium was a market anomaly, not a sustainable arbitrage; structures betting it would persist were structurally fragile.
Aftermath
Su Zhu was arrested in Singapore in September 2023 for non-cooperation with the BVI liquidators and served a contempt-of-court sentence. Kyle Davies has not been located in jurisdictions enforcing the BVI proceedings as of mid-2026. The 3AC liquidation has produced recoveries materially below the $3.5B claim — substantial portions of fund assets remain untraced. Su Zhu and Davies subsequently launched a new exchange (OPNX) in early 2023 focused on trading distressed bankruptcy claims; the exchange struggled commercially and wound down in 2024. The structural lessons from 3AC — unsecured-credit fragility, correlated counterparty risk, the need for daily-mark-to-market collateral — are now standard credit-risk practice across crypto-lending operations and have substantially reshaped the post-2022 market.
Sources & further reading
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