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Three Arrows Capital insolvency rumors draw questions over soundness of DeFi

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Three Arrows Capital insolvency rumors draw questions over soundness of DeFi

Three Arrows Capital insolvency rumors draw questions over soundness of DeFi Samuel Wan · 3 hours ago · 2 min read

Rumors

Rumors on social media allege that Singapore-based crypto hedge fund manager Three Arrows Capital is on the verge of insolvency.

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2 min read

Updated: June 15, 2022 at 11:20 am

Cover art/illustration via CryptoSlate

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Rumors that Singapore-based crypto hedge fund managers Three Arrows Capital (3AC) may be insolvent are doing the rounds on social media.

Three Arrows Capital crypto hedge fund may be insolvent

June 14, 2022https://t.co/z4wtQX9LsO pic.twitter.com/BKmB1ebAw8

— web3 is going just great (@web3isgreat) June 15, 2022

The firm is widely regarded as a major player in the cryptocurrency world. Its most recent investment activities were a $20 million capital raise in the DEX platform Orderly Network on June 9 and a $2.5 million capital injection in data analytics firm Laevitas as its lead investor.

However, rumors are that the recent market turmoil may have left the firm over-exposed. With so many tentacles across many different crypto projects, the question arises: which counterparties may also be significantly affected?

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Is 3AC dumping assets?

The rumors began as on-chain analysis showed 3AC had withdrawn on-deposit stETH from DeFi protocol Aave on Tuesday. According to Defiant, it sold the funds across several transactions totaling around $40 million.

stETH, or Staked Ether, represents Ethereum locked into the Beacon Chain staking contract (which cannot be withdrawn until the mainnet Merge rolls out). stETH acts as collateral to borrow more ETH on DeFi platforms. In other words, it’s a “workaround” that frees value from tokens locked in the Beacon Chain staking contract.

Twitter user @MoonOverlord, taking into account the social media activity of Three Arrows Capital co-founders Kyle Davies and Su Zhu, put two and two together to make insolvency claims.

3AC in trouble? rumors swirling

– Kyle and Zhu havent tweeted or liked anything in days

– Zhu took every coin and # tag out of his bio

– Zhu deleted his instagram

– an hour ago they dumped 30k stETH and reduced all AAVE positions

— moon (@MoonOverlord) June 14, 2022

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Further analysis by @MoonOverlord led him to surmise that 3AC’s stETH “dumping” was to pay for debt obligations.

people think Celsius is the biggest stETH dumper but its 3AC and it isnt relatively close, they are dumping on every account and seed round address they have, most looks like its going to payback debts and outstanding borrows they have pic.twitter.com/9bZnmTXQzj

— moon (@MoonOverlord) June 14, 2022

Will stETH be the straw that broke the camel’s back?

stETH is supposed to trade in 1:1 parity with Ethereum as the derivative token is redeemable for Ethereum once the mainnet Merge happens.

However, since June 9, that “peg” has shown signs of slipping. June 13 saw stETH dip as low as 0.89 against ETH.

Source: STETHWETH on TradingView.com

The following day from the first sign of slipping, stETH token issuer Lido tweeted that DEX prices do not impact a holder’s ability to redeem ETH on a 1:1 basis.

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Staked ETH issued by Lido is backed 1:1 with ETH staking deposits.

The exchange rate between stETH:ETH does not reflect the underlying backing of your staked ETH, but rather a fluctuating secondary market price.

— Lido (@LidoFinance) June 10, 2022

Nonetheless, stETH holders who want to exit their position will still sell at a discounted rate. All of which points to the fragility of DeFi in withstanding volatility.

Zhu posted an ambiguous tweet on Wednesday suggesting things at Three Arrows Capital are not okay and “relevant parties” are affected.

We are in the process of communicating with relevant parties and fully committed to working this out

— Zhu Su 🔺 (@zhusu) June 15, 2022

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More will follow as the situation develops.

adoption

Goldman Sachs looks to buy Celsius’ assets for $2B as it is advised to file for bankruptcy

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Goldman Sachs looks to buy Celsius’ assets for $2B as it is advised to file for bankruptcy

Goldman Sachs looks to buy Celsius’ assets for $2B as it is advised to file for bankruptcy Liam ‘Akiba’ Wright · 9 hours ago · 2 min read

Goldman Sachs is seeking investors to raise $2B to buy Celsius assets if it files for bankruptcy following recent liquidity issues

2 min read

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Updated: June 25, 2022 at 3:19 am

Cover art/illustration via CryptoSlate

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Goldman Sachs is allegedly shopping around for investors to form a web3 fund to purchase Celsius assets.

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The multinational investment bank is raising $2 billion from a wide range of funds to take advantage of a potential discount on Celsius crypto assets.

Should Celsius be forced to file for bankruptcy, it may be required to sell off its assets quickly to pay back any creditors. The exchange has allegedly already been advised to file for bankruptcy by Citigroup and Akin Group.

The news was initially reported by Coin Desk, which cites people familiar with the matter as the source of information.

The struggling exchange reportedly had over $11 billion in assets as of May 2022, meaning if Goldman Sachs could purchase all of Celsius’ assets, it would be paying just 20 cents on the dollar. Whether the group is looking to take Celsius on as a going concern or strip and sell its assets is unknown at this time.

Celsius also received an unsolicited offer from rival exchange Nexo on June 12, which was not accepted. However, Coin Desk reported that Citigroup had been brought in to assess the deal. Nexo has over 4 million users compared to Celisus’ 1.7 million who claimed

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“Nexo is in а solid liquidity and equity position to readily acquire any remaining qualifying assets of Celsius, mainly their collateralized loan portfolio.”

The proposal to purchase Celsius’ “collateralized loan portfolio” is likely to have a similar focus to any potential Goldman Sachs offer. Investors currently without access to their funds held in custody with Celsius may not be enthused by Goldman Sach’s approach.

Upon filing for bankruptcy, a schedule would be created determining the order in which creditors are repaid. Investors will be hoping they will be paid out first, but there are no guarantees.

Celsius hired “restructuring attorneys from law firm Akin Gump Strauss Hauer & Feld LLP to advise on possible solutions for its mounting financial problems.” The move may signal the end of Celsius, which has been silent on the issue since June 20.

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Analysis

Celsius faces a potential short squeeze; $20M bounty out on info about possible attack

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Celsius faces a potential short squeeze; $20M bounty out on info about possible attack

Celsius faces a potential short squeeze; $20M bounty out on info about possible attack Liam ‘Akiba’ Wright · 14 hours ago · 4 min read

Celsius may be insolvent, there’s a $20M bounty for anyone with information about a an attack, and there could be a GameStop-style short squeeze imminent. With very little information coming from Alex Mashinsky, the rumor mill is heating up.

4 min read

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Updated: June 21, 2022 at 8:50 am

Cover art/illustration via CryptoSlate

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There has been a lot of talk about Celsius and its founder Alex Mashinsky over the past week. Some believe the situation is over-hyped, while others fear insolvency is unavoidable.

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The lack of transparency around the entire ordeal is hugely troubling for both retail and institutional investors alike.

$20 million bounty

A $20 million bounty has reportedly been put out for anyone with information confirming there was a concerted attack on Celsius Network from a third party.

CryptoSlate has received reports from major crypto content creators that they have received requests asking if they have been paid to spread FUD about Celsius. None of the creators we have spoken to have been approached to do so, but the reports tie in with Plan C‘s announcement that a bounty is open for anyone with information.

The bounty would reward anyone with information proving that Celsius was the target of a coordinated attack from prominent institutional players. The market analyst asserted:

Any whistleblower willing to speak & provide definitive proof that there was a planned attack on #Celsius will never have to work another day in their life.

A verified reward put forward by a respected #Crypto group of over $20M. #Bitcoin

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DM any information.

Please Retweet 🙏

— Plan©️ #CELShortSqueeze (@TheRealPlanC) June 19, 2022

CryptoSlate reached out to PlanC, who confirmed:

“I know the money is real because I know the group. I talked directly to them, and they have a good reputation in crypto.”

The group allegedly wishes to remain anonymous, so we cannot report the organization’s name at this time. However, anyone with information can contact CryptoSlate’s investigative team via email or Twitter.

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GameStop-like short squeeze

Plan C also believes there are “early signs of another GameStop situation” regarding a $CEL short squeeze. On June 14, CryptoSlate reported that the $CEL token spiked 500% in just 30 minutes. However, as the below chart from FTX shows, from its local low on June 13 to the top of the wick on June 14, there was a 2722% price spike. This spike could undoubtedly have resulted from a short squeeze on those shorting $CEL amid the uncertainty of its insolvency. Yet, Plan C believes there is more to come.

Source: TradingView

The current price of $CEL is up to 86% in the past 24 hours, which is still 89% down from its all-time high in June 2021. Plan C claims that an orchestrated attack on Celsius is to blame for its liquidity issues, and they are not alone. Celsius investor Simon Dixon announced,

“I smell a rat in the leverage boom & deleverage crash. it ends with banks buying up crypto companies & stripping them of their assets before CBDC rollout. Don’t get me wrong, the crypto sector fucked up doing all the things I teach investors to avoid, but I’m following the money.”

The hashtag #CelShortSqueeze has generated over 7,440 tweets within the last 24 hours as investors jump into the belief that the moon is in sight. Allegations have been brought to FTX CEO, Sam Bankman-Fried, claiming he is behind the downfall of Celsius. SBF responded directly to the allegations stating, “this is definitely false, we want to help those we can in the ecosystem and have no interest in hurting them — that just hurts us and the whole ecosystem.” The tweet received over 100 comments which were extremely mixed in their mistrust and support of SBF and FTX.

Some influencers within the crypto community have come out in support of SBF, stating, “FTX & Sam allegedly bailed out massive crypto companies to limit this crypto crash.” At present, SBF has not responded to our requests for further comment. One thing is for sure; there are a lot of unbalanced transactions related to $CEL and FTX. There are many small outflows of 10 – 100 $CEL and a few large inflows of 10,00+ $CEL. The inflows appear to be taking $CEL from other exchanges such as MEXC, 1INCH, OKEX, Gate.io, and Huobi to send to FTX.

This in and of itself is not uncommon as traders move funds around to different accounts, yet the fact that a few large wallets are depositing $CEL onto FTX and almost nowhere else is strange. Interestingly, many of the known wallets for Celsius are still active even though withdrawals are suspended.

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The downfall of Celsius

In a move toward further transparency, a video has come to light, including alleged commentary from a former Celsius employee who claims it made several “mistakes” in handling client funds. The video was released as a part of a video by YouTuber and investigator, Coffeezilla.

Coffeezilla comments how Mashinsky declared many times over the year that Celsius was different from a bank, yet it acted just like a bank. Further, the terms and conditions of the Celsius platform describe all crypto sent to it by users as “loans” rather than actual deposits. The unnamed “insider” also claimed that Celsius was:

“engaging in some fairly risky practices, essentially taking borrowed assets and lending on them multiple times in order to maximise their yield.”

They continued by saying that describing Celsius as a “hedge fund that was playing with retail money is probably a fairly charitable way to describe it.” The former employee explained that Celsius had invested ETH with Stakehound. In June 2021, Stakehound was involved in an incident which resulted in the keys to 38,178 ETH being lost and thus trapping the staked ETH without recourse. The former employee suggested that some of these funds were client funds from Celsius users.

Coffeezilla asserts that Celsius grew “too fast” and tried to “scale too fast” and ultimately “paid the price.” He says they recklessly invested client funds and suffered a liquidity crisis due to a natural downturn in the crypto markets. Finally, Coffeezilla affirms that former Celsius employees described the company as “a story of incompetence.”

What is next for Celsius?

The jury is still out regarding the Celsius fiasco. Several influencer players are claiming, behind the scenes, that there was a coordinated attack against Celsius. Publicly, many are simply declaring that Celsius mismanaged funds and was the victim of its hubris. If you have any information regarding Celsius, you can contact CryptoSlate via Twitter or me either by email or also on Twitter.

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Analysis

The current Celsius, 3AC situation may not be as bad as rumors suggest

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The current Celsius, 3AC situation may not be as bad as rumors suggest

The current Celsius, 3AC situation may not be as bad as rumors suggest Liam ‘Akiba’ Wright · 11 hours ago · 4 min read

3AC debt exposure may be as high as $1.5B but is the real risk related to the fear, uncertainty, and doubt this has created?

4 min read

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Updated: June 19, 2022 at 11:41 pm

Cover art/illustration via CryptoSlate

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One of the more concerning issues around the current insolvency fears for several centralized lenders and investors is the lack of transparency. The news cycle is filled with rumors and theories around Three Arrows Capital (3AC) and Celsius, but very few verifiable facts that we can responsibly report. However, several notable people in the crypto industry working in the intelligence space have released in-depth analyses.

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Is the fallout as bad as predicted?

One of which is the founder of market intelligence company Messari, Ryan Selkis, who ran a Twitter Space where he explored information he had gathered behind the scenes. Selkis downplayed the severity of the 3AC crisis, estimating that there is around.

“$1.5B of net liabilities in terms of how underwater 3AC is… and some proof that it’s been business as usual for basically any counterparty that’s I’ve talked to that’s been transacting with these guys.”

Selkis went on to further explain the crisis stating that “all the FUD around the sky is falling for the western lenders I think is probably overbaked right now.”

Many funds, projects, and lending platforms quickly distance themselves from Celsius and 3AC this week. Some have also come out to confirm liquidations of positions of large third parties. Tether announced they no longer had exposure to Celsius as funds were “liquidated without losses.” The Block also reported that “Crypto exchanges FTX, Deribit, and BitMEX have liquidated Three Arrows Capital’s positions over the past week.”

BlockFi and Genesis both created Twitter threads detailing that they had liquidated a sizeable third party over the past week. However, as neither specifically named 3AC, this could potentially be another large crypto company that has also been struggling with liquidity and under collateralized loans. 3AC lists BlockFi on their website as an investment partner but not Genesis. Many, including Ryan Selkis, believe these positions were, in fact, 3AC, but this is merely conjectured at this point.

If the total exposure for 3AC is $1.5B, as suggested by Selkis, then the direct effect on the market may be pretty minimal. That level of debt would represent just over 1% of the total market cap of the crypto industry and is less than the value of Bitcoin dumped by Terraform Labs during the LUNA crisis. The decline in Bitcoin price may then be mostly contagion from the fear, uncertainty, and doubt created by Celsius, Terra, and 3AC, all having crisis moments within a month.

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Industry Insiders discuss the crisis.

Selkis was joined in the Twitter Space with some other prominent CEOs and analysts from within the crypto ecosystem, including the CEO of BlockFi, Zac Prince. Prince stated that given the current state of crypto lending, “a self-regulatory path is not a particularly viable option.” Earlier in the conversation, he also confirmed that he agreed that regulation would “need to be worked out” following the current crisis.

Also on the call, Frank Chapparo, the editor at The Block, claimed that 3AC has been

“hitting up everyone trading desks, token projects… to profit from a GBTC arbitrage trade…and they kind of knew the merry-go-round was coming to an end… they potentially figured out they could win it all back in one trade.”

Chapparo also confirmed that he had spoken to projects that said 3AC had contacted them to take on:

“Their entire treasury to do treasury management for these projects and the entire treasury…They were being pitched on having them sent 3 arrows, you know, hundreds of millions of dollars of their treasuries tokens.”

According to Chapparo, “the terms of some of these deals are also really bad,” suggesting that there may be some severe fallout for any company that accepted 3ACs offer to hold its treasury. Selkis, earlier in the conversation, mentioned a valid point that these projects are unlikely to come forward at this time as it could both tank their token prices and reduce their positioning in any future litigation against 3AC.

Both The Defi Edge and FatManTerra have reported that 3AC offered a yield return of 8% for holding project treasuries. Defi Edge claims that projects have reported being “ghosted” by 3AC when attempts have been made to contact the firm. It stated, “now we’re in a situation where SOME of the protocols they’ve invested in…their treasuries might be gone.” In this instance, the fallout for these projects could be enormous. FatManTerra built on these claims saying

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“3AC borrowed money from multiple funds and counterparties and put it into Anchor to generate yield without telling them. Their UST position was confirmed to be at least nine figures before the Terra depegging event.”

Three Arrows Capital Website

Interestingly, to access the 3AC website, users must acknowledge a terms and conditions pop-up that contains a disclaimer explaining that.

“because of the risks involved, investment in a Three Arrows Capital fund is only suitable for sophisticated investors who can bear the loss of a substantial portion or even all the money the invest in the Fund without altering their standard of living.”

The language in this clause is slightly unusual as it references “standard of living” as a critical indicator. This phrasing could potentially become a primary focus of future litigation as counterparties may reasonably argue that their standard of living has decreased after losing hundreds of millions of dollars.

The entire situation is shrouded in mystery. This is a difficult position to accept in an industry used to the transparency of on-chain transactions. Increased transparency is needed to reinstate confidence in the markets. Investors currently have no idea where to put their money in order to gain even a small yield. Crypto wallets remain one of the most secure places to store funds during chaotic times and many are reaffirming the motto, “not your keys, not your coins.”

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