As Three Arrows Capital, the troubled crypto hedge fund, struggles through liquidation proceedings in the British Virgin Islands and bankruptcy-court hearings in New York, a behind-the-scenes drama is playing out over the value of a key asset: an indirect stake of nearly 17% in Deribit, the digital-asset industry's preeminent options exchange.
One estimate getting passed around by creditors puts the value as high as $500 million, according to a document shared with CoinDesk by a person who's directly involved in the process.
But the stake may be worth far less.
One reason is that the stake is locked up in a complicated legal structure that might impair Three Arrows’ ability to quickly liquidate the asset, based on a review of corporate filing and court documents. And Three Arrows appears to have used “side letters” over the years to quietly sell off interests in the special purpose vehicle created to hold the Deribit shares.
Another issue is that the private-market valuation of Deribit's shares is believed to have fallen during the recent crypto crash, the person said. And Deribit itself has a claim on Three Arrows that may now be significantly impaired.
According to court filings, the hedge fund owes about $80 million to Deribit, including unpaid loans and negative values in a trading account.
Deribit acknowledged the claim in a tweet on June 16 that also confirmed Three Arrows had been a shareholder in the company since February 2020.
"Due to market developments, Deribit has a small number of accounts that have a net debt to us that we consider as potentially distressed," the options exchange said on Twitter.
The person with knowledge of the matter estimates that Three Arrows' interest in Deribit is now worth as little as $25 million.
The Singapore SPV
The Deribit stake is held through a Singapore-incorporated investment vehicle called 3AC QCP Deribit SPV Pte. Ltd.
The lead investors and two largest shareholders in this SPV are Three Arrows Capital and QCP Soteria Node (QSN), documents show.
According to a corporate filing in Singapore, the directors of the SPV are Three Arrows co-founder Su Zhu along with Darius Sit, co-founder of QCP Capital, and Sherwin Lee, who is founder and director of QCP Soteria Node. According to his LinkedIn profile, Lee also is a venture partner in 3AC QCP Deribit SPV.
There are 31 shareholders listed in the Singapore corporate filing.
One shareholder of the SPV, Kenrick Drijkoningen, is also listed as a creditor in documents released by the BVI liquidator.
Drijkoningen didn't respond to a message sent to his LinkedIn profile.
The person with knowledge of the matter said the SPV holds an estimated 23% stake in Deribit. Three Arrows owns about 70% of the SPV.
But the SPV shares are subject to several material encumbrances.
For one, the owner of the SPV shares cannot sell or transfer the underlying Deribit shares without unanimous consent of all shareholders in the SPV, the person said.
Whoever ends up owning the stake could not remove Sit or Lee, the two non-Three Arrows directors, because they are entrenched under the SPV's corporate rules, the person said.
Plus, the investment firm QCP Soteria Node has a right of first refusal on the deal, under a binding side letter between Three Arrows and QCP Soteria Node, the person said.
Whatever the true market value, the Deribit shares have already become a focal point for creditors trying to recover losses stemming from the Three Arrows meltdown.
Source of security
In documents included in an affidavit submitted as part of the British Virgin Islands liquidation proceedings, an affiliate of the crypto trading firm Genesis Global Trading claimed Three Arrows should deposit the Deribit shares "into a third-party escrow account for safekeeping pending the resolution of this arbitration."
According to Genesis, some $462.2 million of additional collateral is owed under trading-loan agreements. (Genesis is owned by Digital Currency Group, which also owns CoinDesk.)
"Genesis is aware that Three Arrows directly or indirectly owns the Deribit shares and the StarkWare shares, which could be sold to pay part of an eventual award against Three Arrows, but in light of Three Arrows' conduct it is likely that Three Arrows will seek to dissipate such shares without legal intervention," a lawyer for Genesis Asia Pacific wrote in one of the documents.
A request for comment sent to a media email address for Genesis had not been returned as of press time.
Sam Reynolds and Bradley Keoun contributed to this report.
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