FTX Liquidates $1.53 Billion in 3AC Assets Before Collapse

Newly revealed court documents have shed light on a significant event in the cryptocurrency world. FTX, a prominent cryptocurrency exchange, secretly liquidated $1.53 billion in assets belonging to Three Arrows Capital (3AC) just two weeks before the hedge fund's collapse. This revelation comes from court filings that detail the financial transactions leading up to 3AC's downfall. According to the documents, 3AC held $1.53 billion in assets on FTX as of June 12, 2022. Over the next two days, these assets were liquidated to cover a significant portion of the hedge fund's liabilities. This liquidation was a critical move that ultimately contributed to the hedge fund's financial distress and eventual collapse.

The liquidation of 3AC's assets by FTX raises several questions about the relationship between the two entities and the broader implications for the cryptocurrency industry. The timing of the liquidation, just two weeks before 3AC's collapse, suggests that FTX may have had prior knowledge of the hedge fund's financial troubles. This could indicate a level of coordination or at least awareness between the two parties, which could have significant legal and regulatory consequences.

3AC, once valued at over $10 billion, collapsed in mid-2022 after a series of leveraged directional trades turned sour. The hedge fund had borrowed from over 20 large institutions before the May 2022 crypto crash, which saw Bitcoin (BTC) fall to $16,000. The crypto hedge fund claims it was never notified of these liquidations due to FTX’s own bankruptcy proceedings. A court ruled that 3AC acted in good faith, allowing it to pursue its full $1.53 billion claim in FTX’s bankruptcy case.

On Dec. 21, 2023, a British Virgin Islands court froze $1.14 billion worth of 3AC co-founder Kyle Davies and Su Zhu’s assets. Teneo has since estimated that 3AC creditors are still owed roughly $3.3 billion following the hedge fund’s collapse in 2022. Davies claimed that allegations from Teneo — the firm in charge of 3AC’s liquidation — that he and co-founder Su Zhu were “not cooperating” were exaggerated.

The U.S. bankruptcy court in Delaware authorized 3AC liquidators on March 13th to increase their claim against FTX to $1.53 billion. This authorization is a significant development in the ongoing legal battle between the two entities. The court's decision to allow 3AC to expand its claim against FTX suggests that the liquidators are seeking to recover as much of the lost assets as possible. This move could set a precedent for future legal actions involving cryptocurrency exchanges and hedge funds, highlighting the need for greater transparency and accountability in the industry.

The liquidation of 3AC's assets by FTX also underscores the interconnected nature of the cryptocurrency market. The collapse of a major hedge fund like 3AC can have ripple effects throughout the industry, affecting other exchanges, investors, and market participants. The fact that FTX was able to liquidate such a large amount of assets in a short period of time highlights the liquidity and volatility of the cryptocurrency market. This event serves as a reminder of the risks involved in investing in cryptocurrencies and the importance of due diligence and risk management.

While the $1.53 billion sum is significantly larger than FTX’s previously disclosed liquidations, it may not have been enough to save 3AC from bankruptcy. Nicolai Sondergaard, research analyst at Nansen, stated, “From what I can see, even if they in 2022 had the additional $1.5 billion they still would not have been able to meet creditor claims/debt repayments.”

“Without being a legal expert, it seems to me that 3AC, while being allowed to pursue a much larger amount, likely won’t get the full $1.53 billion claim. It seems realistic that they will get more, but how much is uncertain,” the analyst added.

In conclusion, the liquidation of 3AC's assets by FTX is a significant event that has far-reaching implications for the cryptocurrency industry. The timing and circumstances of the liquidation raise important questions about the relationship between the two entities and the broader regulatory environment. As the legal battle between FTX and 3AC continues to unfold, it will be crucial for industry participants to closely monitor the developments and their potential impact on the market.