The Three Arrows Capital debacle is proving to be far more profound than the implosion of a single hedge fund. While various crypto fund lenders such as Celsius, BlockFi and others are hoping for bailouts, crypto broker Voyager Digital is officially filing for bankruptcy.
The spectacular fall of what was once the largest crypto hedge fund, Three Arrows Capital (3AC), continues to make waves in the industry. Founded in 2012, the firm's winning streak ended with its massive over-leveraging through multi-billion dollar loans to various crypto service providers, which has come to an end with the recent downturn in the markets. As the next major collateral damage, crypto brokerage Voyager Digital is also going bankrupt alongside Three Arrows.
Unsecured loan of USD 650 million
In its letter to the bankruptcy court in New York, the broker offers a look at its numbers. The publicly traded firm owns about $1.3 billion in its clients' cryptocurrencies and $350 million in cash reserves. Of that, $110 million in assets have been set aside for the Chapter 11 bankruptcy process. So in total, Voyager Digital manages about $1.76 billion. On the other side of their balance sheet, however, the situation doesn't look as promising.
A $650 million loan was issued to Three Arrows Capital some time ago, collateral was apparently not required for it. With the default on that loan, the repayment of which Voyager Digital says it is pursuing through the courts, an enormous hole suddenly appears in the company's records. The Chapter 11 bankruptcy filing would allow Voyager to reorganize, compensating customers with restored funds and shares of the new company; a full refund of customer deposits seems rather unrealistic.
No risk management at crypto institutions?
Voyager Digital's insolvency is another frightening example of how even publicly traded institutions do not always have their risk under control. An unsecured loan worth one-third of total customer funds should never have passed their compliance framework, even though Three Arrows was considered a highly reputable player in the past. The company's customers may now suffer the consequences of this.
The fact is that the Singaporean hedge fund speculated with borrowed funds and exposed highly questionable practices at countless crypto service providers with the default of their billion-dollar debt. The full extent of the incident remains unclear, as Three Arrows Capital was well-connected in the industry and managed the company reserves of a wide variety of portfolio projects. The hedge fund's bankruptcy proceedings, initiated a week ago, should soon bring some clarity to the case.
