Three Arrows Capital Ordered Into Liquidation After $3 Billion Hedge Fund Collapse Triggers Crypto Contagion

A court in the British Virgin Islands ordered the liquidation of Three Arrows Capital (3AC), a Singapore-based cryptocurrency hedge fund that managed $10 billion in assets just months earlier, after the firm lost over $3 billion and defaulted on hundreds of millions in loans to crypto lenders. Founded in 2012 by Kyle Davies and Su Zhu, the fund collapsed after making highly leveraged bets on cryptocurrencies that imploded when the Terra/Luna ecosystem crashed in May 2022, losing approximately $200 million on LUNA tokens alone. The fund faced $3.5 billion in creditors’ claims, including $2.36 billion owed to Genesis and over $665 million to Voyager Digital. Court liquidators reported that Davies and Zhu refused to cooperate with the liquidation process and their whereabouts were unknown, though they later emerged from hiding to announce plans to flee to Dubai, a country without extradition treaties with Singapore or the United States. Liquidators discovered the founders made a $50 million down payment on a superyacht during the crisis, with one stating “Mr. Davies intends this yacht to be larger than any yacht owned even by Singapore’s richest billionaires.” The collapse exposed catastrophic regulatory failure: 3AC operated as an unregistered, unregulated hedge fund managing billions in crypto assets with extreme leverage and no oversight. On June 24, 2022, Dubai’s regulator confirmed 3AC was not registered with the Dubai Financial Services Authority. On June 30, 2022, Singapore’s Monetary Authority revealed it had only reprimanded 3AC for breaching its $250 million management threshold—a slap on the wrist as the fund managed $10 billion. The regulatory void allowed 3AC to mislead counterparties about its exposure, fail to meet margin calls, and trigger cascading liquidations that caused a 48% fall in total crypto market capitalization. The contagion bankrupted major crypto lenders including Voyager Digital, Celsius Network, and BlockFi, causing billions in retail investor losses. The case demonstrated how crypto hedge funds operated as shadow banks with no capital requirements, disclosure obligations, or fraud prevention—enabling founders to gamble with billions in customer and lender funds, then flee prosecution. Zhu was finally arrested in September 2023 at Singapore’s airport while trying to flee the country and sentenced to four months for failing to cooperate with liquidators, an absurdly light sentence given the $3.5 billion fraud.