Source claims 3AC's Deribit exposure is worth much less than reported

Court documents that describe the insolvency of failed crypto hedge fund Three Arrows Capital, also known as 3AC, may be overestimating the value of the firm’s remaining assets — specifically, its exposure to crypto options exchange Deribit.

In a 1,100-page affidavit composed by liquidator Russell Crumpler and filed in a British Virgin Islands court, 3AC was described as “insolvent” and in need of being completely “wound up” because “Its management cannot be trusted to retain any remaining assets for the benefit of creditors.” The documents also detailed 3AC’s remaining assets, which included shares of Grayscale Bitcoin Trust (GBTC), cryptocurrencies Bitcoin (BTC), Avalanche (AVAX) and Near (NEAR), and shares of Deribit. Liquidators want access to these assets in order to facilitate creditors’ claims, which are worth at least $2.8 billion.

Total claims right now are $2.8bn. Many have not made any claims yet, or quantified the amount of their claims for confidentiality reasons. Expect this figure to rise substantially as the deadline to make a claim is right up to the day before distributions are to be made
— Soldman Gachs ⌐◨-◨ (@DrSoldmanGachs) July 19, 2022

According to the affidavit, the Deribit shares are believed to be worth $500 million, or half of 3AC’s remaining assets. However, a source with knowledge of the matter told Cointelegraph that the value of 3AC’s Deribit shares is closer to $25 million rather than $500 million, suggesting that creditors will be left holding the bag on their loans to the failed hedge fund.

According to the source, who chose to remain anonymous, the discrepancy between the two amounts is due to the type of exposure 3AC has to Deribit. They claim that 3AC does not directly own shares in Deribit but instead owns shares in a Singapore Special Purpose Vehicle (SPV) called 3AC QCP Deribit SPV. The largest shareholders of the SPV are 3AC and QCP Soteria Node, a holding company whose portfolio includes Algorand and PundiX, according to its website. The SPV’s directors include QCP Soteria Node founder Sherwin Lee, QCP Capital co-founder Darius Sit and Three Arrows Capital co-founder Su Zhu.

The source further explained that the SPV owns over 23% of Deribit, making it the largest external shareholder. Of that total, 3AC owns 16%, making it the largest shareholder in the SPV.

Sadly, our good faith to cooperate with the Liquidators was met with baiting. Hope that they did exercise good faith wrt the StarkWare token warrants. pic.twitter.com/CF73xI8r6n
— Zhu Su (@zhusu) July 12, 2022

“The SPV shares are worth significantly less than direct Deribit shares due to several material encumbrances,” the source said, adding:

“The owner of the SPV shares cannot sell or transfer the underlying Deribit shares without unanimous consent […] This means that the owner of the shares will be stuck with the SPV. These are entrenched in SPV constitution.”

The source claimed that QCP Soteria Node also has certain contractual powers, including the right of first refusal and tag-along rights, on 3AC’s SPV shares based on a side letter agreement between the two parties.

Over the course of several years, 3AC had been selling portions of its 16% stake through “binding side letters to numerous parties who are now claiming that they have an ownership on the 3AC SPV shares,” they said. “There are at least four known parties who have these side letters and have put in their claims to ownership of the 3AC shares in the SPV. Some of them are on the liquidator’s official list of creditors.”

The source claimed that a “significant discount” would need to be placed on the value of their shares due to these underlying encumbrances:

“A significant discount needs to be placed on the value of the 3AC SPV shares because any buyer of these shares would be subject to these encumbrances and would have significant difficulty monetizing the shares in the future and would also have to deal with the entire SPV which has close to 30 members.”

Three Arrows Capital represents one of crypto’s most significant falls from grace. Once the most revered hedge fund in the industry, holding over $10 billion in assets under management, 3AC began to implode in the wake of the Terra ecosystem collapse. Among its missteps was placing a series of large directional bets on GBTC, LUNA (now LUNC) and Lido’s Staked ETH during the worst macroeconomic backdrop since the 2008 financial crisis.

Cointelegraph attempted to reach out to Three Arrows Capital on the matter, but did not receive a response prior to publication.

Author Joseph Hall contributed to this story.