The 3AC Liquidity Crisis
Last Monday (June 27), gaming, non-fungible tokens (NFTs) and crypto VC Three Arrows Capital (3AC) received a notice from digital asset brokerage company Voyager Digital after defaulting on a USD 670 million loan – USD 350 in USDC and about USD 320 million in BTC (15,250 BTC).
Reuters reported that on the very same day a British Virgin Islands court ordered 3AC’s liquidation and that consultancy firm Teneo was appointed as liquidators. At the end of the week, according to court documents, the VC filed for Chapter 15 bankruptcy in New York. This means that 3AC is seeking protection from creditors in the United States since Chapter 15 of the U.S. Bankruptcy Code allows foreign debtors to shield US assets and to block eventual lawsuits against them.
In a press release published on June 30, Singapore’s Monetary Authority (MAS) also reprimanded 3AC “for providing false information to MAS and exceeding the assets under management (AUM) threshold allowed for a registered fund management company (RFMC).”
3AC’s struggles started due to a prolonged period of decline in cryptocurrency prices. Major cryptocurrencies plunged more than 60% since March 2022 and the overall crypto market capitalization went down from close to USD 3 trillion in November 2021 to less than USD 900 million in June 2022. Fintech experts believe that the crypto winter would last from one to two years depending especially on the worsening macroeconomic conditions worldwide.
What are the metaverse projects 3AC invested in?
Alex Svanevik, CEO of Nansen, published information about 3AC’s NFT portfolio on Twitter saying “better unwrap these pengus before liquidation”:
Some of the top NFT collections in 3AC’s portfolio are Bored Ape Yacht Club (BAYC), Mutant Ape yacht Club (MAYC), Otherside by Otherdeed, Alien DNA and Alien Insects. However, these NFTs would most probably face liquidation risks as soon as consultancy firm Teneo initiates work in regards to the VC’s liquidity problems. Such a scenario may have a negative impact on the NFT market, which recently experienced slight recovery, though not enough to cover loses following the Terra incident.
3AC’s investment strategy was to target emerging asset markets. The VC invested in a number of metaverse and NFT companies. Some notable examples include:
- NFT blockchain game Axie Infinity that was hacked by North Korea hacking group Lazarus and lost close to USD 625 million.
- NFT blockchain game company Crypto Raiders, which raised USD 6 million in April 2022. The funding round was led by DeFiance Capital and Delphi Digital but included also GuildFi, Merit Circle, Three Arrows Capital, Yield Guild Games and others.
- Multiverse – a synergistic ecosystem for building businesses, scaling personal economies, communicating quickly, and enhancing human interactions.
- Nyan Heroes – a play-to-earn NFT game that in May 2022 raised USD 7.5 million in a strategic round to fund game development.
- Avalanche’s first AAA metaverse game Imperium Empires.
- Avocado Guild – an NFT game on Solana, successfully raised USD 18 million in November 2021.
- Solice – a Metaverse project built on Solana which raised USD 4.36 million during their seed round in November 2021. Investors included 3AC, Animoca Brands, and DeFiance Capital.
Will these projects be impacted by 3AC’s liquidity crisis?
It’s very likely that the company will initiate the selling of vested tokens it received in exchange for backing these blockchain businesses. This means more selling pressure in a bear market that is already unstable. The smaller projects in which 3AC invested (e.g. Imperium Empires) may be the most vulnerable ones. The price of Imperium Empires’ token IME fell more than 65% in a month – from USD 0.003463 on June 2 to USD 0.001191 on July 2. For comparison, total cryptocurrency market cap declined 31% during the same period.
Of course, larger companies with ties to 3AC are not protected. Take Voyager Digital as an example.
Following the demise of 3AC, Voyager Digital announced that it is temporarily suspending trading, deposits, withdrawals and loyalty rewards:
“This decision gives us additional time to continue exploring strategic alternatives with various interested parties while preserving the value of the Voyager platform we have built together. We will provide additional information at the appropriate time,” said Stephen Ehrlich, Chief Executive Officer of Voyager.
To support its exploration of strategic alternatives, the company has engaged Moelis & Company and The Consello Group as financial advisors, and Kirkland & Ellis LLP as legal advisors.