The latest and one of the biggest casualties of the recent sharp downturn of the crypto markets (otherwise known as the “crypto winter”) is the Singapore-based hedge fund Three Arrows Capital, Ltd (“Three Arrows”). Three Arrows was founded in 2012 by Zhu Su and Kyle Davies, both former Credit Suisse traders. In March 2022 it was reported to manage an estimated US$ 10 billion of assets, which had decreased to US$ 3 billion by April 2022.
Three Arrows has entered liquidation in the British Virgin Islands (“BVI”) following claims that it failed to pay US$ 80 million owed to DRB Panama Inc (“DRB”), a crypto trading platform with a focus on derivatives. The crypto broker Voyager Digital has also issued Three Arrows with a notice of default for failing to make the required payments on a loan worth more than US$ 665 million. Russell Crumpler and Christopher Farmer of Teneo (BVI) Ltd were appointed as joint liquidators, and potential creditors of Three Arrows can expect Teneo to set up a website to receive claims in the coming weeks. As a preliminary step, Three Arrows has filed for Chapter 15 bankruptcy in US in a move to protect its US assets during the BVI liquidation proceedings.
The bad news for Three Arrows continued when the Monetary Authority of Singapore (“MAS”) issued it with a reprimand for managing substantially more funds than it had previously represented and, last week, MAS announced that it is assessing if there were more breaches of its rules by Three Arrows following the recent concerns about the solvency of the fund.
The Three Arrows collapse raises several novel issues and key challenges. Initially, the collapse is likely to involve considerations of laws across several jurisdictions – from the BVI to Singapore and other countries – around assets that are, unlike traditional assets, not sited in any particular location but on the decentralised “borderless” blockchain. Unlike monies in a bank account with a bank licensed in a country, shares of a company incorporated in a certain place, or real estate in a fixed location, digital assets that lie in the blockchain may find themselves simultaneously subject to the jurisdiction of various countries. Consequently, the need to coordinate actions across borders and to prevent inconsistent decisions from different countries is even greater.
Creditors seeking recourse may face complex questions around valuation of the digital assets they hold. Currently, there appear to be serious questions surrounding the proper valuation of the security held by creditors to ascertain the specific debts (and any under-leveraging). This is not necessarily a straightforward exercise, as some may consider the present crypto winter to be part of a correction cycle and that, while the present dip appears to be particularly intense, the longer-term valuation of certain cryptocurrencies needs to be accounted for. There may be differing methodologies used with varying focus on the utility, value, and market attributes around a cryptocurrency.
Consideration of strategic advances may be made by creditors who, bearing in mind that the classification of creditors may be a challenge where each creditor could hold virtually different security, decide to remain part of (or stay outside of) certain creditor classes. For example, a creditor could hold cryptocurrencies with a bundle of bitcoin and a mix of various stablecoins, and another creditor could hold some bitcoin, a notably larger mix of stablecoins plus a right to be paid bitcoin (instead of actually holding bitcoins). They may or may not be classed together, depending on the applicable criterion. Such uncertainty could prove to be an advantage for some creditors.
In probably the first time in history on such global scale, we might see fresh financing or re-financing being provided with the creation of a new blockchain and minting cryptocurrencies on the new blockchain as a way to diversify value in a restructuring portfolio. Another possibility may be for a crypto white knight to swap financial assets or a mixed bundle of digital assets for such new cryptocurrencies, in a bid to obtain greater voting power in a restructuring. Or indeed, in a cramdown, the lower priority creditors may be issued a proportion of the newly minted cryptocurrencies for each dollar of loss as an interim measure for further discussions. The governance protocol for the new blockchain would have to be carefully calibrated to prevent abuse. For example, there could be a deliberate increase of liquidity in the blockchain at a later time in an attempt to dilute voting power.
Finally, it is important to consider situations where some creditors might have already started to use technology to gain a possibly unfair advantage over other creditors. For instance, a creditor could have the technological power under a DAO protocol to compel foreclosure of cryptoassets in advance of any creditors’ meetings or Court decision. Having the technological “might” to do this does not necessarily mean one has the legal “right” to obtain the digital asset. Such actions would require careful consideration of compliance with the relevant asset protection laws.
We are one of a rare handful of international law firms with offices in the BVI and Singapore with full rights of audience before the Courts in both jurisdictions and with over 100 lawyers in a global cryptocurrency and digital assets practice group.
We have an active practice working with clients to develop and deploy effective cross border strategies when disputes arise relating to cryptocurrencies and digital assets. This work includes enforcement work across a myriad of jurisdictions and advising clients on investments in digitals assets. Please get in touch with Shaun Leong, FCIArb, Sara-Jane Knock, Sinead Harris and Martha Eker-Male if you would like us to share our expertise or to understand in further detail any of the points covered in this piece.