Cryptocurrency hedge fund Three Arrows Capital has become the latest victim to succumb to the "Crypto Winter" after a court in the British Virgin Islands ordered the company into liquidation.
According to initial reports from Sky News, consulting company Teneo has been brought on board by the court to resolve Three Arrows' indebtedness. The company's financial problems had already reached a fevered peak before the court decision, with crypto broker Voyager Digital issuing a default notice on Monday for $670 million worth of loans that Three Arrows had taken out.
The order marks the most drastic development of the crypto winter, which has seen the unregulated de-fi industry implode upon itself. Three Arrows, only the latest and one of the largest victims of the collapse, perfectly illustrates the causes of the catastrophic crypto winter.
How Did it Get This Far in the First Place?
Like most blockchain-based companies, Three Arrows Capital was extremely over-exposed to market risks simply by the sheer volume of projects it backed within the unregulated and notoriously volatile market.
Three Arrows' website, while threadbare in design and lacking any information on the company or its personnel, lists just some of the many blockchain projects in which the firm has a stake. Many of those listed projects are facing similar degrees of pressure, such as the crypto game Axie Infinity, which suffered from a crippling hack in addition to the winter pushing prices down. Other investments include BlockFi, which joined the likes of Coinbase (NASDAQ: COIN) and other crypto brokers in laying off workers due to over-expanding during the pandemic heyday of crypto.
The lack of regulation over the industry has meant that as the cryptocurrency market crumbles, there is nothing stopping traders from making digital bank runs. With no safety net for de-fi firms or the investors they serve, Three Arrows is left with hundreds of millions in unpayable debt, clients with no recourse or hope to recover their funds, and many invested companies facing a sudden loss of financing.
Bills are slowly being introduced by legislators worldwide to address the yawning chasm of regulatory ambiguity around crypto. Still, these efforts will do nothing to help traders facing a complete market meltdown.
What Comes Next?
Three Arrows' future, as short as it may seem at the time of writing, has already been determined by British courts. However, the companies that relied on it for funding face a much more depressingly uncertain future.
Larger blockchain firms like BlockFi, while likely feeling the pressure of Three Arrows' liquidation, will ultimately survive the firm's collapse. However, for smaller ventures like NFT games Axie Infinity and Imperium Empires, Three Arrows' liquidation could be much direr if the projects cannot secure additional funding. Given the current apocalyptic conditions of the crypto market, securing financing will likely prove to be immensely difficult.