Chapter 11 is a phrase which has entered the vernacular of most cryptocurrency investors this year. In short, it is the legal filing for bankruptcy, which has befallen a slew of crypto-related funds and platforms this year.
One such platform is (was?) Three Arrows Capital (3AC), the crypto hedge fund founded by Kyle Davies and Su Zhu. Following a trading strategy that seemingly centred around being as leveraged and risky as possible, 3AC were forced to pay the piper when markets turned ugly.
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The Terra death spiral of May was what kicked things off. An enormous exposure meant the writing was on the wall for Zhu and the gang, if only he still refused to acknowledge it at the time.
Needless to say, 3AC were no more. The dominoes continued, however, taking us to the protagonist of this piece, Voyager Digital. Last month Voyager announced that 3AC had defaulted on a $670 million loan, a bloated amount compared to the $137 million in US dollars and crypto assets that it held.
Zhu and Davies resurfaced after a month of hiding according to a report with Bloomberg. While I partially have sympathy for a trading strategy gone horribly wrong, the manner in which they have dealt with this is nothing short of deplorable. Unfortunately, it is the regular retail customer which suffers the most, with their defaulted loans and actions sparking a dirty wave of contagion sparing nobody.
“It’s not a surprise that Celsius, ourselves, these kind of firms, all have problems at the same time”, the founders said to Bloomberg, if all too late. “We have our own capital, we have our own balance sheet, but then we also take in deposits from these lenders and then we generate yield on them. So if we’re in the business of taking in deposits and then generating yield, then that, you know, means we end up doing similar trades.”
What we failed to realize was that LUNA was capable of falling to effective zero in a matter of days and that this would catalyze a credit squeeze across the industry that would put significant pressure on all of our illiquid positions
Three Arrows Capital co-founder Zhu Su
With Voyager one of these creditors, their investors are now staring at a 99% loss in share price and a Chapter 11 filing of their own. This week, Sam Bankman-Fried, who has adopted the role of lender of last resort in the crypto markets, waded in with an offer to purchase the embattled firm at “fair market value”.
His proposal would grant customers the option to be refunded at least part of their locked-up funds with Voyager, rather than waiting for the lengthy (likely years-long) process of Voyager’s own Chapter 11 proceedings.
“Voyager’s customers did not choose to be bankruptcy investors holding unsecured claims,” Bankman-Fried said in a statement. “The goal of our joint proposal (involving three of his firms) is to help establish a better way to resolve an insolvent crypto business – a way that allows customers to obtain early liquidity and reclaim a portion of their assets without forcing them to speculate on bankruptcy outcomes and take one-sided risks.”
However, Voyager slammed the offer, rejecting it outright before labelling it “a low-ball bid dressed up as a white knight rescue”
Bankman-Fried argued that, by offering a route for customers to use FTX to redeem some of their holdings, they could avoid the nightmarish Chapter 11 process. A quick look at the length of time it took the Mt GOX exchange to deal with those legal troubles shows that he has a point. There is such thing as time value of money, after all.
Voyager’s stance, however, is that it is a nasty publicity stunt hoping to present FTX as an altruistic entity when in reality the proposal would offer customers less money than they otherwise would retrieve through bankruptcy proceedings.
The ongoing pursuit of 3AC was highlighted as a big factor by Voyager, who remain adamant that customers have a chance at retrieving some funds – something that accepting the Bankman-Fried offer would put a close to. But Bankman-Fried affirmed via FTX that customers “can continue to pursue Three Arrows Capital for additional recoveries”
For my part, I think any trust in firms such as 3AC, Voyager, Celsius or the likes has long since evaporated. I tend to think that Sam Bankman-Fried and FTX are acting on good faith here. Sure, they have skin in the game too with regards to the potential marketing push and reputation gains, but if it helps customers then who cares?
Voyager, in turning down this deal, better deliver on that promise to get customers more of their funds back. If they don’t, they have made yet another error in what is becoming a shockingly long list.
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