Crypto collapse: 3AC’s Grayscale two-step — and where in the world are Zhu and Davies?

By Amy Castor and David Gerard

The bitcoin price is going back up. It’s currently around $23,200, after sinking to $19,000 in June. Does this mean the crypto crash is over? No.

When the price of bitcoin goes down, so does the trading volume. When the volume goes down, so does liquidity. It doesn’t take much to nudge the price up again. The amount of actual cash in the system remains very low.

Tether is printing again too, but only in small amounts of 100 million USDT at a time. So far. [Twitter]

You can see our previous crypto collapse report here. For a better understanding of how all this happened in the first place, read how 2020 set the stage for the 2021 bitcoin bubble.



When all the money’s gone

In liquidation and bankruptcy proceedings, it can easily take two to three years just to come up with a settlement plan, and years longer to disburse the funds. Mt Gox went dark in early 2014 — and creditors are still waiting for their money. Ditto for QuadrigaCX, which went dark in early 2019.

Bankruptcies are expensive! Celsius and Voyager use the same law firm, Kirkland and Ellis. The lawyers just sent in a bill to Voyager for $3 million for three weeks’ work. [Bloomberg Law]

We expect professional fees to climb to $100 million or more. The professionals get paid first — that’s money creditors will never see.

Voyager and Celsius have to come up with settlement plans for their creditors to vote on. But first, they each have to submit a disclosure statement — a lengthy 100-plus-page document that explains how they ended up in this situation and discloses their financial details.

After filing a bankruptcy petition, Voyager and Celsius have 120 days to come up with a settlement plan, but the court can extend that up to 18 months if needed. After that, the creditors can submit their own plans. [Bankruptcy Basics]

Adam Levitin and Wassielawyer talked to Laura Shin’s “Unchained” podcast about the 3AC liquidation and the Celsius and Voyager bankruptcies. They both expect these bankruptcies to go on for a long, long time. [Unchained]

Terraform, UST and luna

Russell Wong at the Federal Reserve Bank of Richmond, Virginia, wrote up how UST and luna worked. He says that Anchor was not technically a Ponzi: “Anchor’s deposit is more like an MMMF [money market mutual fund] with a huge sign-up bonus, courtesy of its private investors.” [Richmond Fed]

While we agree it wasn’t technically a Ponzi scheme, it still worked just like one. Early investors could only be paid out with actual dollars coming in from later investors, just as in the rest of the crypto markets.

From Argentina to Nigeria, people wanted US dollars instead of their local currency, because of instability and high inflation — but governments often regulated against actual US dollars. Stablecoins like UST were advertised as a reasonable alternative, so the buyers went all-in. They lost everything. “I felt betrayed by Binance for promoting this as safe and stable.” The collapse of UST has hit the crypto market worldwide: “The impact of what happened will be, by far, the biggest negative impact that crypto has ever had in Latin America.” [RestofWorld]

Roche Freedman has made a business out of filing class actions against deep-pocketed crypto firms. They’ve now filed against Binance US over the collapse of UST. Yes, Binance US actually listed UST and luna. The class action alleges that both UST and luna are unregistered offerings of securities. [Complaint]

Law firm Bragar Eagel & Squire have filed a class action against Terraform Labs and others. They too claim that Terra’s tokens were unregistered securities, and that Terraform Labs duped investors into buying the tokens at inflated prices. [Press release; Blockworks]

Three Arrows Capital

Three Arrows Capital (3AC) had its second bankruptcy hearing in the US on 28 July. The lawyer for Teneo, 3AC’s liquidator, says the whereabouts of 3AC founders Su Zhu and Kyle Davies remain a mystery — and the pair are handing over financial info piecemeal. [Yahoo Finance]

3AC was based in Singapore and incorporated in the British Virgin Islands, but Teneo filed Chapter 15 bankruptcy in the US — bankruptcy of a foreign entity with US assets. In a US bankruptcy case, if you knowingly conceal assets, that’s a crime. If Zhu and Davies continue to be uncooperative, they could be looking at up to five years’ jail time. [Cornell Law]

Of course, neither Zhu nor Davies is in the US. And they’re not in Singapore either — where the Monetary Authority of Singapore issued a reprimand to 3AC in June.

Based on what Zhu and Davies previously told Bloomberg, they’re en route to Dubai, which has no extradition treaty with the US.

Frances Coppola took a deep dive into the 1,157-page affidavit filed by Teneo in Singapore.

3AC’s failure wasn’t from UST collapsing — it had been coming for years. 3AC’s December 2020 accounts show just how indebted and overleveraged it was, with badly strained cash flows.

3AC resorted to “Ponzi borrowing” — borrowing cash to pay previous debts — which lasts only as long as there are more lenders. Come UST’s crash … there weren’t.

“After Luna blew a massive hole in its balance sheet, it robbed Peter to pay Paul, lied to its customers and ghosted the creditors on whose loans it was defaulting.”

3AC declared bankruptcy … and then started moving stablecoins (and NFTs!) to unknown addresses, via the KuCoin crypto exchange. Teneo called for an asset freeze.

Coppola is pretty sure all the money’s gone, and creditors will be lucky to get anything. [Coppola Comment]

This spells bad news for Voyager’s creditors as well — most of Voyager’s money was in 3AC.

The Grayscale two-step

Data Finnovation thinks — based on publicly available data, including Teneo’s 1,157-page filing in Singapore on 3AC’s bankruptcy — that 3AC and Digital Currency Group, along with DCG’s Grayscale and Genesis subsidiaries, were working together to extract a premium from GBTC.

Genesis lent out BTC that 3AC then used to buy shares of GBTC. “At this point we have absurd coincidence #1: 3AC sold 15 million shares [of GBTC] during a period where DCG bought somewhere between 15 and 18 million shares. If these are arms-length operations that feels exceptionally unlikely. It is possible. But come on.”

Genesis also messed around with whether GBTC was accounted for at its market price or at the net asset value. Grayscale’s accounting treatments also varied wildly.

3AC seems to have gone insolvent over the UST-luna collapse weekend, at which point their GBTC loans were margin-called. “Genesis financed this fiasco. They lent 3AC BTC. And then, effectively, lent them more USD against those very BTC. That sounds absurd. And it is.”

All of this would, of course, be resolved if GBTC was converted into a proper ETF. No wonder Grayscale is suing the SEC to try to force an ETF through.

The other danger now for DCG is that Grayscale is an SEC-registered securities issuer and Genesis is an SEC-registered broker-dealer — so there’s quite a lot of data on their dealings with 3AC that the SEC can just ask them for. [Data Finnovation]


Tether recouped an $840 million loan to Celsius ahead of Celsius’ bankruptcy filing by selling bitcoin that Celsius had pledged as collateral. This won’t necessarily protect Tether from clawbacks.

Crypto companies have treated such loans as “secured” by the collateral, and think that simply taking possession of crypto collateral protects their position as a secured lender — but this isn’t at all clear legally. Under the 90-day-rule, they could still be required to return the assets, and be left with an unsecured claim in the bankruptcy. [Tether blog, archive; FT, archive]

Celsius in the Daily Telegraph (UK): “‘It’s very closely analogous to 2008,’ says David Gerard, author of Libra Shrugged: How Facebook Tried To Take Over the Money. ‘They couldn’t resist playing the market with customer funds.’” [Telegraph]

Molly White continues to track excerpts from Celsius creditor letters. ​​[Molly White]

Celsius Network discovered on 8 July that the company’s customer address list had leaked. Celsius say that one of’s employees accessed a list of Celsius client email addresses, and transferred the list to a third-party. Celsius finally told everyone on 28 July, twenty days later. [Reddit]


Voyager’s Creditor Committee have their own lawyers now: Will & Emery LLP, who have set up a website for updates to creditors. You can even subscribe to get email alerts. [WM]

The FDIC and the Federal Reserve issued a cease-and-desist statement and gave Voyager two days to remove all the misleading marketing material about being FDIC insured. Nice of them to bother, about a year too late. Voyager filed for bankruptcy three weeks ago, and customer deposits are already frozen. [Press release; Letter]

FTX and Alameda have offered to purchase all of Voyager’s crypto assets and loans (except the 3AC loan) and pay the cash purchase price into an escrow account. The idea is that any Voyager user can then create an FTX account and withdraw their share of the cash proceeds. [FT, archive; Coindesk]

Voyager doesn’t like Sam Bankman-Fried’s partial bail-out proposal, calling it a “low-ball bid dressed up as a white knight rescue.” But also, if you’re a creditor, you should “really read it” anyway. [Stretto, PDF]

Metropolitan Commercial Bank is asking the court to let it release Voyager customers’ cash. Metropolitan holds two accounts that were opened by Voyager and are governed by an FBO (for benefit of) agreement between the bank and Voyager — but which hold Voyager’s customers’ money. As of the bankruptcy filing, the accounts at Metropolitan hold $270 million. [Filing, PDF]


Babel Finance, the Hong Kong-based crypto lender that froze withdrawals on 17 June, has retained Kirkland and Ellis to advise on its restructuring. [Bloomberg Law, paywalled]

Babel proposes a rescue plan that would turn its creditors into shareholders, raise $250-300 million in convertible bonds, then secure a $200 million line of credit from creditors for “business restoration.”

Babel lost $230 million (in bitcoin and ether) of customer funds on bad trading. [The Block]


Crypto exchange and lending platform Vauld has been granted a three-month moratorium by the Singapore High Court. The court also asked Vauld to form a creditors committee. (Vauld operates from India, but is incorporated in Singapore.)

Vauld filed for a moratorium on 8 July, shortly after suspending withdrawals. Vauld claims no exposure to 3AC or Celsius. Vauld owes $402 million to creditors – $363 million of that being deposits from retail investors.

London-registered (but Bulgarian-operated) Nexo has until September 5 to reach a decision on whether to bail out Vauld. [The Block]

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