Reorg Asia Bi-Weekly
Crypto Night (June 28 – July 11)

From Reorg Asia’s Managing Editors
In this column, managing editors Stephen Aldred and Shasha Dai take turns writing about trends in high yield, distressed debt, restructuring and bankruptcy in major Asian markets including China, Southeast Asia, India and Australia. Any opinions or other views expressed in this column are the author’s own and do not necessarily reflect the opinion or views of Reorg or its owners. For questions or comments, contact Stephen at saldred@reorg.com and Shasha at sdai@reorg.com.

Whether you regard crypto currency as the future of finance or a collective hallucination that allows retail investors to gamble away large chunks of real cash on a Ponzi scheme of epic proportions, you can’t ignore the sector.

By many accounts – including the Bank of England – the market capitalization of crypto assets globally reached the $3 trillion mark some time in late 2021, but the sector has since shed over $2 trillion of that value.

Crypto has always been volatile, even before an extended run-up fueled by a search for returns in a low interest-rate environment and legions of get-rich-quick day traders locked in bedrooms during a global pandemic and fed on a diet of headlines touting fabulous returns.

The causes of the collapse in valuations are well documented and include exposure of vulnerabilities like liquidity mismatches leading to run dynamics and fire sales, and leveraged positions being unwound and amplifying price falls, according to the Bank of England.

The collapse in valuations inevitably generated a barrage of memes, about fry cooks who became Blockchain Investors/Web 3.0 Experts but are now fry cooks again, or buying the dip when the dip keeps dipping.

But with the $60 billion wipe-out of Terra’s stablecoin terraUSD and Bitcoin and Etherium losing 70% of value, bankruptcy proceedings have emerged along with the meme barrage.

Concern about dissipation of assets has already emerged in filings related to the high-profile case of crypto hedge fund Three Arrows Capital, or TAC, late last week.

Foreign representatives for TAC originally filed a chapter 15 petition in New York on July 1. The company was formed in 2012 under BVI law, states the declaration, and is wholly owned by Singaporean corporate parent Three Arrows Capital Pte. Ltd., declarations accompanying the chapter 15 filing show.

Declarations state that TAC was “reported” to have over $3 billion of assets under management in April and is “heavily invested in cryptocurrency, funded through borrowings.” The declarations also cite “various news outlets,” which state that a “substantial portion” of TAC’s investment portfolio comprised Luna cryptocurrency, which “lost 99% of its value” in mid-May. TAC filed its chapter 15 facing a $675 million ‘equivalent’ demand from crypto platform Voyager Digital and a potential asset freeze.

Voyager itself filed a chapter 11 petition late in the day on July 5, seeking relief to address a “short-term ‘run on the bank’ due to the downturn in the cryptocurrency industry generally and the default of a significant loan made to a third party.”

Under its plan, Voyager said that customers with crypto in their accounts will receive in exchange a combination of proceeds from the TAC recovery, common shares in a newly reorganized company and Voyager tokens. Voyager referenced claims against TAC of “more than” $650 million in a first day relief presentation on July 9.

But foreign representatives for TAC on the same day sought emergency relief in connection with the chapter 15, pointing to a lack of cooperation from TAC’s founders and warning that absent provisional relief “there is an actual and imminent risk that the Debtor’s assets may be transferred or otherwise disposed of by parties other than the court appointed Foreign Representatives to the detriment of the Debtor, its creditors, and all other interested parties.”

The risk is “heightened” because a significant portion of the debtor’s assets are cash and digital assets such as cryptocurrencies and non-fungible tokens “that are readily transferrable,” the motion shows.

Specifically, the July 9 motion discloses that the whereabouts of TAC’s founders, Zhu Su and Kyle Livingstone Davies, are currently unknown and they “have not yet begun to cooperate with the Foreign Representatives in any meaningful manner.”

The foreign representatives argue that the provisional relief sought through the motion – which includes authority to serve discovery on the founders and others who may have information regarding the debtor’s assets or affairs – would “mitigate the risk of transfers or disposals” of the debtor’s assets by parties other than the foreign representatives “and authorize discovery narrowly targeted at obtaining fundamental information” about the debtor’s assets.

The TAC and Voyager cases will be closely watched for guidance on the process of restructuring and discovery within an asset class which, let’s be honest, gained its initial popularity among global crime syndicates because of its ability to completely avoid regulatory oversight.

To put it another way, unwinding complex derivatives contracts in the wake of the Lehman Brothers bankruptcy might ultimately lead you to an international investment bank as counterparty. The suspicion is that chasing down crypto assets might ultimately lead to an encrypted USB stick in North Korea.

–Stephen Aldred, Managing Editor – Asia