FTX Accelerated 3AC’s Downfall After Liquidating $1.53B in Assets

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Newly unsealed court filings show that FTX secretly liquidated $1.53 billion worth of Three Arrows Capital (3AC) assets just two weeks before the hedge fund collapsed in 2022.

The disclosure challenges previous claims that 3AC’s downfall was purely market-driven.

Once managing over $10 billion, 3AC collapsed in mid-2022 after a series of failed leveraged trades. The hedge fund borrowed from more than 20 major institutions before the May 2022 crypto crash, which saw Bitcoin drop to $16,000. However, recent evidence suggests FTX liquidated a substantial amount of 3AC’s holdings before its collapse.

According to “Mbottjer,” a pseudonymous co-founder of FTX Creditor, a group representing FTX creditors and claim buyers, 3AC asked a bankruptcy court to increase its claim against FTX from $120 million to $1.53 billion. The hedge fund argues it was unaware 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 claim.

In December 2023, a British Virgin Islands court froze $1.14 billion in assets belonging to 3AC co-founders Kyle Davies and Su Zhu. Liquidator Teneo estimates that 3AC creditors are still owed $3.3 billion following the fund’s collapse.

While the newly revealed liquidation is larger than previously disclosed, analysts doubt it would have been enough to save 3AC. Nansen research analyst Nicolai Sondergaard noted that even if 3AC had access to the extra $1.5 billion, it still would have struggled to meet debt repayments. He added that while 3AC can now pursue a much larger claim, securing the full amount remains uncertain.

The revelations sparked industry speculation, with Binance co-founder Changpeng Zhao calling it an “interesting turn of events” and questioning whether FTX played a role in the LUNA/UST crash in May 2022. The collapse of 3AC followed the downfall of Terraform Labs’ Terra (LUNA) and UST stablecoin, and came just before crypto lender Celsius froze withdrawals after its token crashed 90%.