The collapsed crypto hedge fund Three Arrows Capital (3AC) borrowed and paid back more than $2B from Blockchain.com over the course of almost four years before it filed for bankruptcy.
Charles McGarraugh, CSO of Blockchain.com, provided the information in an affidavit to Teneo, the company chosen last month by the British Virgin Islands court to manage 3AC’s liquidation.
Blockchain.com CEO Peter Smith previously claimed in a shareholder letter that 3AC had borrowed and repaid more than $700M in crypto over that four-year span.
As it turns out, the $2B in crypto and fiat currency represents the total amount, whereas the $700M describes the largest amount of loans 3AC ever had out.
The affidavit demonstrates that on June 13, 2019, Blockchain.com and 3AC executed a master loan agreement (MLA). On June 14, 3AC received a demand notice from Blockchain.com for its unpaid loans, on June 16, 3AC missed the deadline and stopped making payments.
A Blockchain.com spokesperson noted “Blockchain.com was right to be deeply concerned about Three Arrows Capital months ago. Three Arrows Capital defrauded not only Blockchain.com but the entire crypto industry. We intend to hold them accountable to the fullest extent of the law.”
The total amount that 3AC still owes was not specified by Blockchain.com in the affidavit, but it was reported that Blockchain.com could suffer losses of $270M as a result of its 3AC lending.
The majority of 3AC’s debt, according to the affidavit, consists of open loans that do not have a specified maturity date.
McGarraugh casts doubt on the veracity of 3AC’s disclosed net asset value (NAV) before the company stopped making loan payments in the affidavit. The loan agreement between the two companies required 3AC to deliver monthly reports demonstrating this metric.
An additional statement from 3AC on May 13 showed a NAV of $2.387B, which was the most recent NAV report that 3AC gave to Blockchain.com.
The affidavit states that 3AC requested Blockchain.com to continue any open loans it had with the business and refrain from calling them or demanding repayment. 3AC co-founder Kyle Davies reportedly told a representative that 3AC would boycott Blockchain.com’s business if Blockchain.com recalled any loans.
McGarraugh claimed that Davies informed him that 3AC had suffered a loss of about $200M on Luna and that this loss had already been taken into account in the company’s disclosed NAV.
The affidavit noted, “Relying on Mr. Davies’ representations on this call, I calculated that 3AC had only (1) USD $1.5 billion of directional exposure and (2) USD $2 billion borrowed, so that even in a highly adverse scenario, if the markets dropped 33% and all of their borrowing based trades went against them by 20%, they would still only experience roughly USD $900 million in losses.”
In the affidavit, McGarraugh also stated that 3AC had to inform Blockchain.com if its leverage exceeded 1.5x or if trading losses reached or exceeded 4% of its equity.
Also Read: Five-member Creditors Committee Formed for 3AC’s Liquidation
Although 3AC had made some partial loan repayments to Blockchain.com, the affidavit states that the remaining balance is “substantial”.
