The liquidator of Three Arrows Capital (3AC) is reportedly considering a move to reclaim approximately $1.2 billion from Digital Currency Group (DCG) and cryptocurrency lender BlockFi. These funds represent payments made by the hedge fund before the liquidation process began, but as the specter of liquidation loomed large.
A confidential report dated July 7, prepared by Teneo, the liquidator in charge, outlined the potential claims against DCG and its subsidiary, Genesis lending. The report, viewed by CoinDesk, stated that over $1 billion constituted “prospective claims,” encompassing preference claims and claims arising from issues concerning loan and security documentation. Furthermore, the document highlighted that BlockFi had received approximately $220 million in “preferential payments.”
When questioned about the potential efforts to reclaim funds, Teneo declined to provide any comment. Similarly, DCG and BlockFi did not respond to requests for statements. DCG, being an investor in various cryptocurrency companies, is the parent company of CoinDesk, the source of this information.
Preference claims arise when a hedge fund is aware that its payments afford certain creditors a better position than others. In this case, the transactions made by 3AC during the insolvency twilight zone following the collapse of the Terra Luna project in early 2022 are the focus of contention.
The liquidator’s interest in reclaiming such a significant amount of money underscores the complexity and challenges inherent in managing the liquidation of hedge funds within the cryptocurrency industry. The insolvency twilight zone, as it is referred to, is a critical period where decisions made can have far-reaching consequences for various stakeholders.
Teneo, as the liquidator of 3AC, is tasked with the responsibility of protecting the interests of all creditors and conducting a thorough investigation into the financial affairs of the hedge fund. The potential clawback of funds from DCG and BlockFi suggests that Teneo has identified irregularities or potential improprieties in the aforementioned payments.
For DCG and its Genesis lending subsidiary, the liquidator’s attempt to reclaim funds may result in a protracted legal battle. Similarly, BlockFi may find itself embroiled in contentious proceedings as it confronts the attempt to claw back preferential payments.
The outcome of this situation will be of significant interest to the cryptocurrency industry and its participants. It may shape future practices and impose greater scrutiny on financial transactions within the sector. The liquidation process of Three Arrows Capital serves as a cautionary tale for hedge funds as they navigate the complexities of insolvency and strive to protect the interests of all stakeholders involved.