Web3 Weekly: U.S. Regulators Looking Into Three Arrows Collapse

This is a weekly feature that will look back at the week that was in crypto, blockchain and Web3 and offer insights and analysis. Check out last week’s here.

The downfall of crypto hedge fund Three Arrows Capital—also known as 3AC—and the incredible fallout it created will be investigated by U.S. regulators.

Both the Commodity Futures Trading Commission and the Securities and Exchange Commission are looking into whether the firm violated any rules related to misleading investors about its own holdings and not registering with either agency, Bloomberg reported this week.

The tentacles of 3AC’s collapse reach into nearly every aspect of the current crypto winter the industry is weathering right now.

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The firm filed for bankruptcy in July after the downturn in digital currencies left it unable to meet obligations. Part of its significant losses stemmed from the crash of the algorithmic stablecoin TerraUSD in May. Algorithmic stablecoins use financial engineering to maintain their 1-to-1 peg between the backup assets. In UST’s case, it is pegged to a cryptocurrency called Luna.

While the stablecoin’s fall reverberated throughout the industry, it also left 3AC unable to pay lenders despite once claiming it had a few billion dollars under management.

The bankruptcy led to some of 3AC’s creditors such as crypto lenders Celsius Network and Voyager Digital also having to declare bankruptcy after not receiving the money they said they were owed.

Those bankruptcies rattled the industry, as even retail investors felt the effects by not being able to access their holdings.

Late last month, it was announced Sam Bankman-Fried’s crypto exchange giant FTX would buy the assets of crypto lender Voyager Digital. The U.S. subsidiary of FTX will pay the current estimated market price of $1.3 billion, plus an additional $111 million in anticipated incremental value, according to a blog post by Voyager.

Meanwhile Celsius’ CEO Alex Mashinsky decided to step down as the lender itself is being investigated.

What will become of 3AC’s investigation is impossible to say and may not matter. The whereabouts of its founders are unknown—the court-appointed liquidator has asked a judge to subpoena them through their Twitter accounts and email addresses since other methods have failed—and there seem to be limited assets to pay creditors.

However, it may give some closure to one of the more rocky summers the crypto sector has seen and wrap up the final chapters of a tangled plotline that helped draw the industry into our current crypto winter.