Liquidators of Three Arrows Capital (3AC) are seeking $1.3 billion from Terraform Labs due to the 2022 crash of LUNA and TerraUSD – the two native tokens of the Terra blockchain. LUNA and UST were designed to maintain a $1 peg through an algorithmic mechanism, but a systemic failure led to a catastrophic collapse in their values.
The liquidators according to a Bloomberg report claim that TerraForm, with Three Arrows as one of its investors, manipulated the market for LUNA and TerraUSD, artificially inflating their prices before they crashed. This led to substantial losses for Three Arrows, affecting not only their investments in LUNA and TerraUSD but also in other assets.
Three Arrows Capital (3AC) was a major cryptocurrency hedge fund based in Singapore, founded in 2012 by Su Zhu and Kyle Davies. It started by trading foreign exchange derivatives but grew to manage billions in crypto assets, becoming a top venture capital firm in the space.
However, 3AC ran into big trouble in 2022 when the TerraUSD (UST) stablecoin and LUNA tokens collapsed. 3AC had invested heavily in LUNA, with its position reaching around $560 million at the peak. But when UST lost its dollar peg and LUNA crashed to zero, 3AC suffered massive losses it couldn’t recover from.
The hedge fund’s problems were worsened by using too much-borrowed money (leverage) and poor management of risks. It failed to meet margin calls from lenders. In June 2022, a court in the British Virgin Islands ordered 3AC to shut down after it defaulted on loans to various creditors.
3AC’s implosion had a domino effect, contributing to the downfall of other crypto firms like Voyager Digital. By the time it filed for bankruptcy, 3AC owed around $3.5 billion to 27 creditors, making it one of the biggest hedge fund failures. The founders’ disappearance and refusal to cooperate with liquidators further complicated the messy aftermath.
Over a year ago, 3AC founders launched a new exchange called Open Exchange or OPNX which according to the CEO, Leslie Lamb was aimed at helping the industry amid the collapse of FTX and Celsius.
The exchange will allow users to claim tokens representing their loss in failed and bankrupt projects/firms in crypto such as FTX and Celsius.
However, the project just within weeks was in the news for the wrong reason as some investors denied investing in the firm. In response, OPNX CEO stated that it was “troubling to see certain investors, who aggressively negotiated for maximum equity and claim to support our mission, later attempt to publicly disassociate themselves.” “Thankfully, everything is documented”.
Eleven months ago, Zhu Su was arrested in Singapore and sentenced to 4 months in prison, and in early February 2024, a US court approved a confidential settlement between BlockFi and 3AC.
It is still uncertain how much money the liquidators will be able to recover from TerraForm. The company filed for bankruptcy in January, which means it admitted it couldn’t pay its debts. Now, TerraForm is in the process of liquidating, meaning it will sell off its assets to pay back creditors as much as possible.
