Three Arrows Capital (3AC), a Singapore-based crypto hedge fund, filed for bankruptcy in July 2022. It owed more than $2.8B to creditors at the time it went bust, and is widely blamed for fueling the collapse of the crypto ecosystem.

Why should we care?
3AC’s demise offers lessons for lenders and regulators alike. The crypto hedge fund courted lenders with alluring returns, which 3AC delivered upon during bullish markets, but not bearish ones; crucially, few lenders received collateral on their loans, meaning 3AC was leveraged at least three times its assets. To lenders who did receive collateral on their loans, they were often promised equity that had already been offered to other lenders. “I suspect they might be 80 percent of the total original contagion,” said FTX CEO Sam Bankman-Fried in reference to 3AC and the current crypto winter. “They weren’t the only people who blew out, but they did it way bigger than anyone else did. And they had way more trust from the ecosystem prior to that.” In addition to its sketchy borrowing terms, 3AC offered warning signs in its branding and messaging. Su Zhu, one of 3AC’s co-founders, intentionally built himself into a “crypto Twitter” celebrity by prophesying a “supercycle,” in which bitcoin prices would rise into the millions of dollars; his accrued clout contributed to crypto institutions taking him and 3AC seriously, and, over time, lending billions of dollars to the crypto hedge fund. These two red flags—uncollateralized loans and zealous marketing on Twitter—offer two roadmaps for regulators looking for future bad actors in crypto and finance, and invite us to consider the ulterior motives of the loudest pro-crypto boosters online.