Three Arrows Capital (3AC) faces deadline to repay or default on loans

Billions of dollars worth of value have been wiped from the cryptocurrency market in recent weeks. Companies in the industry are feeling the pain. Credit and trading companies are facing a liquidity crisis and many companies have announced layoffs.

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Three Arrows Capital, a crypto-focused hedge fund, must meet a deadline Monday to repay more than $670 million in loans or risk bankruptcy in a case that could have a ripple effect on the digital asset market.

3AC, as it is also called, is one of the most prominent crypto hedge funds out there and is known for its high leverage bets.

But with the billions of dollars wiped from the digital coin market in recent weeks, the hedge fund faces a potential liquidity and solvency problem.

Voyager Digital, a digital asset brokerage, said last week that it had loaned 3AC 15,250 bitcoins and $350 million from the stablecoin USDC. At Monday’s prices, the total loan equates to more than $675 million. Voyager gave Three Arrows Capital until June 24 to repay $25 million USDC and the entire outstanding loan by June 27, Monday.

None of those amounts have been refunded, Voyager said last week, adding that it can issue a default notice if 3AC doesn’t refund the money.

Voyager said it “intends to pursue 3AC’s reinstatement” and is talking to its advisers “about available remedies.”

Voyager Digital and Three Arrows Capital were not immediately available for comment when CNBC reached out to them.

Voyager, listed on the Toronto Stock Exchange, saw its shares plunge 94% this year.

How did 3AC get here?

Three Arrows Capital was founded in 2012 by Zhu Su and Kyle Davies.

Zhu is known for his incredibly optimistic view of bitcoin. He said last year that the world’s largest cryptocurrency could be worth $2.5 million per coin. But in May of this year, as the crypto market began to collapse, Zhu said on Twitter that his “supercycle price thesis was unfortunately wrong”.

The onset of another so-called “crypto winter” has hurt digital currency projects and businesses across the board.

Three Arrow Capital’s troubles appeared to start earlier this month after Zhu tweeted a rather cryptic message that the company is “communicating with relevant parties” and “completely committed to working this out”.

There was no follow up on what the specific problems were.

But the Financial Times reported following the tweet that US-based cryptocurrency lenders BlockFi and Genesis have liquidated some of 3AC’s positions, citing people familiar with the matter. 3AC had borrowed from BlockFi but was unable to meet the margin call.

A margin call is a situation where an investor has to put in more money to avoid losses on a transaction involving borrowed money.

Then the so-called algorithmic stablecoin terraUSD and its sister token luna collapsed.

3AC had exposure to Luna and suffered losses.

“The situation in Terra-Luna has really taken us by surprise,” 3AC co-founder Davies told the Wall Street Journal in an interview earlier this month.

Contamination risk?

Three Arrows Capital continues to face a credit crunch, exacerbated by continued pressure on cryptocurrency prices. Bitcoin hovered around the $21,000 level on Monday and is down about 53% this year.

Meanwhile, the US Federal Reserve has signaled further rate hikes in an effort to contain rampant inflation, which has left riskier assets out of whack.

3AC, one of the largest crypto-focused hedge funds, has borrowed large sums of money from various companies and invested in a number of different digital asset projects. That has led to fears of further contagion in the sector.

“The problem is that the value of their [3AC’s] assets have also declined tremendously with the market, so all in all, not a good sign,” Vijay Ayyar, vice president of business development and international at crypto exchange Luno, told CNBC.

“What needs to be seen is if there are any large, remaining players exposed to them that could cause further contamination.”

A number of crypto firms are already facing liquidity crises due to the market slump. This month, lender Celsius, which promised users super-high returns for depositing their digital currencies, paused withdrawals for customers citing “extreme market conditions”.

Another cryptocurrency lender, Babel Finance, said this month it is “under unusual liquidity pressure” and has halted withdrawals.

CNBC’s Abigail Ng contributed to this report.

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