Breaking: Three Arrows Accused Of Misappropriating Customer Funds

Embattled crypto hedge fund Three Arrows Capital faces allegations of using customer funds to meet margin calls on its positions.

Danny Yuan, the head of crypto trading firm 8Blocks Capital, alleged that Three Arrows had used about $1 million of 8Blocks’ funds to answer its margin call. 8Blocks had entered into an agreement with the hedge fund in 2020 to use the latter’s trading accounts.

The allegations come as Three Arrow faces liquidations on multiple fronts by its debtors, amid a sharp decline in the crypto market.

The firm has reportedly already seen some of its positions closed, which has also to some extent caused a decline in the crypto market, especially Ethereum prices. 

Three Arrows allegedly ghosted customers, debtors

8Blocks’ Yuan alleged in a Twitter thread that the firm had initially requested Three Arrows for a withdrawal of its funds earlier this week, which was ignored.

The firm then noticed that about $1 million of its funds with Three Arrows was missing. 8Blocks’ attempts to reach Three Arrows were ignored again.

Yuan further alleges that Three Arrows had not answered margin calls from several of its debtors, which caused them to liquidate the hedge fund’s positions. This in turn caused a dump in the broader market.

The 8Blocks head is now calling for legal proceedings against the hedge fund. To this end, he called on other crypto platforms holding Three Arrows’ assets to freeze their positions, so that they can be recovered by lenders through legal action.

Three Arrows founder Zhu Su said this week that the firm is “communicating with relevant parties” over the recent downturn. But Su has also distanced himself from Ethereum on Twitter.

Crypto markets stabilize, so no liquidations for now

Crypto markets have now stabilized somewhat from recent losses, reducing the threat of a broader liquidation for Three Arrows.

But the firm is not out of the woods. Its high exposure to Lido Staked Ethereum (stETH) is exposing the firm to margin calls, given that the token has de-pegged from Ethereum.

Its exposure to beleaguered lender Celsius, which recently suspended withdrawals, is also expected to pressure its portfolio.