Voyager calls time on Three Arrows as crypto fund teeters on the brink

ByFreda D. Cuevas

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In this issue

  1. Voyager: Slings and arrows
  2. BIS on stablecoins: Is crypto fatally flawed?
  3. Chinese NFTs: Risks without rules

From the editor’s desk

Dear Reader,

The current market turbulence in the digital asset space has prompted some colorful language among investors and industry watchers, but in recent days a number of utterances heard less frequently in the sector have entered common usage. Terms such as “distressed assets,” “margin call” and “bailout” are now very much part of the conversation.

This is the language of traditional finance, not an everyday part of the crypto vernacular. Yet here we are, discussing the fortunes of the digital asset industry in precisely these terms.

In a way, it should come as no surprise, given the increasingly well-established correlation between the crypto segment of the digital asset sector and traditional financial markets. It’s hard to avoid concluding that — not least amid the influx of TradFi-speak — the crypto market, in a fairly fundamental way, is starting to look a lot like a traditional equity market.

This has a number of implications. The first and most reassuring of these is that it suggests crypto is here to stay. Traditional markets go through booms and busts, yet they don’t disappear altogether.

A second is that the industry is maturing. It’s well understood that emerging sectors go through growing pains and that shakeouts are a feature. The dot-com crash two decades ago still stands as the most vivid recent illustration of this: Its frothy exuberance claimed many casualties, but some of the world’s most successful enterprises emerged from it.

Add to that the fact that traditional finance sector businesses, including some of the biggest names on Wall Street, are not retreating from the digital asset space but pushing further into it — a clear sign that the sector retains ample appeal in the world of grown-up finance. Why else would Goldman Sachs be building a US$2 billion fund to acquire the assets of distressed crypto lender Celsius?

Third — and related to both the industry shakeout and increased TradFi engagement — is that greater market concentration among industry players and of ownership of assets may be in the works. Crypto exchange FTX, for instance, is in a tussle with investment firm Morgan Creek Capital Management to acquire a majority stake in troubled crypto lender BlockFi. Crypto-utopians won’t like such accumulations of market power, but they’re hardwired into capitalism, of which the digital asset industry is very much a part.

And finally, given the likely persistence of the correlation between crypto and traditional markets, the current moment may present an opportunity for investors with focused minds and strong stomachs. The bolder among them are, perhaps, recalling another lesson from the dot-com crash: Among all the ventures that failed, the next Google or Amazon may well be gestating.

Until the next time,

Angie Lau,
Founder and Editor-in-Chief

1. Voyager’s one-way ticket?

Voyager’s one-way ticket?
Voyager Digital is the latest high-profile company to be dragged into the vortex of spiraling losses at Three Arrows Capital. Image: Canva

Cryptocurrency broker Voyager Digital this week issued a notice of default to crypto hedge fund Three Arrows Capital after it failed to pay back a loan of more than US$665 million. 

  • Three Arrows has failed to meet multiple margin calls over the past few weeks, including from crypto lenders BlockFi and Genesis, according to the Financial Times. Three Arrows’ liquidity crisis, fueled by its exposure to Terra’s collapsed LUNA token, has weighed on an already stressed crypto market.
  • Last week, Voyager said it had asked Three Arrows to pay back US$25 million of USD Coin (USDC) by June 24 and the remainder of the USDC and Bitcoin (BTC) it had loaned the fund by June 27. The loan consisted of 15,250 BTC, worth US$309 million at current prices, and US$350 million of USDC. Three Arrows missed both deadlines and Voyager is now in discussions with the fund to “pursue recovery.”
  • Voyager, which secured a credit line of US$500 million from crypto trading giant Alameda Research last week, said it had used US$75 million of those funds to honor customers’ withdrawal requests.
  • The firm slashed its daily withdrawal limit to US$10,000 from US$25,000 on June 23, a day after it disclosed its exposure to Three Arrows. As of June 24, Voyager had US$137 million in cash and digital assets, the firm said in a statement.
  • The news of Voyager’s exposure to Three Arrows sent the firm’s share price into a nosedive, and it has lost more than 73% since last week.
  • Meanwhile, crypto futures exchange CoinFLEX last week joined a growing list of crypto platforms to halt all withdrawals. The company said it expected to resume withdrawals by June 30 and said it had no exposure to Three Arrows, which is reportedly at risk of insolvency.

Forkast.Insights | What does it mean?

Crypto companies and their lightning-fast growth had been expected to eat into the profit margins of traditional finance firms. Yet today, the opposite is happening. While Voyager struggles to recoup its losses, hedge funds have been quietly making a killing out of betting against it and the wider markets. 

Quant hedge fund firms, which rely on computer algorithms to try to predict market movements, are compounding the problems of businesses such as Three Arrows and projects such as Voyager by shorting the very assets those projects depend on. 

Firms like KPTL Arbitrage Management and Systematica Investments have made double-digit gains in crypto, while other fund managers are struggling to recover losses amid the market rout. 

This is creating headaches for crypto companies trying to pay off debt. Increased downward pressure on crypto prices, paired with spooked investors trying to extract cash amid fears of company collapses, is creating the perfect environment for short sellers, and projects such as Voyager are caught in the melee. 

With central banks unmoved by the market’s travails, there is no safety net for investors right now.

2. BIS blames crypto for holding back DeFi

BIS blames crypto for holding back DeFi
Bank of International Settlements General Manager Agustin Carstens is among those casting doubt on crypto’s viability. Image: Alex Wong/Getty Images

By the numbers: Stablecoins — over 5,000% increase in Google search volume.

The Bank for International Settlements (BIS), a central bank for the world’s central banks, says the structural flaws of cryptocurrencies have materialized in the aftermath of the collapse of algorithmic stablecoin Terra, calling into question the prospects of crypto becoming a recognized and respected part of the global monetary system.

  • In its annual economic report released on Sunday, BIS said: “Recent events have shown how structural flaws prevent crypto from achieving the levels of stability, efficiency or integrity required for a monetary system.”
  • The report highlighted stablecoins, saying: “The fact that stablecoins must import the credibility of central bank money is highly revealing of crypto’s structural shortcomings.” It added: “Only the central bank can provide the nominal anchor that crypto craves.”
  • BIS called for regulators to ensure that crypto and DeFi activities complied with requirements in place for comparable traditional financial activity. Stablecoin issuers, for instance, could be regulated in the same way as deposit takers or money market funds.
  • Financial institutions’ growing investment in the crypto space could cause shocks in the industry to spill over, BIS warned, but it said developments in the crypto market were unlikely to cause a systemic crisis similar to the implosion of bad loans that triggered the global financial crisis between mid-2007 and early 2009, according to a Reuters report.

Forkast.Insights | What does it mean?

“Nothing important has ever been built without irrational exuberance,” venture capitalist Fred Wilson of Union Square Ventures wrote of the dot-com crash of two decades ago in the 2015 book “Boom & Bust: A Look at Economic Bubbles.”  

The bloodbath on crypto markets and the ensuing tut-tutting from the broader financial sector share similarities with Wilson’s commentary on the dawn of Web 2.0

Back then, tech companies thrived, thanks to cheap credit and an investor community hungry to capitalize on the new asset class. The U.S. Federal Reserve was less than pleased about the sudden rise of profitless companies and an overheating economy, and it raised interest rates three times in a single year. 

Internet companies became distressed, allegations of fraud and misappropriations of funds abounded, and within two years the tech sector had lost US$5 trillion in market capitalization since its peak. Sound familiar?

That’s because crypto, like tech 20 years ago, is still in its formative stages. Blaming crypto companies for their instability speaks to a misunderstanding of why digital assets have become incredibly popular. Crypto thrives in mismanaged economies — witness crypto adoption rates in Turkey, Lebanon and Brazil, for instance. Digital assets were created as an antidote to traditional finance, not a complement to it. If financial services have high costs and barriers to entry, crypto represents the opposite. 

Regulation is required to help prevent further collapses. But the ideas currently being explored in the digital asset space — as in tech in the noughties — will give birth to companies and industries that will define the next generation of the web. They just need time.

3. China’s collectibles conundrum

China’s collectibles conundrum
Chinese NFT platforms operate in an environment of regulatory uncertainty, caught between their desire to operate normally and hostility from state media and government authorities. Image: Envato Elements/Canva

A Chinese NFT marketplace is no longer accepting new customers and is now buying back assets it had sold due to concerns about China’s lack of regulatory clarity.

  • Yucang Digital Collectibles announced this week that its operations would continue, but that sales and transfers of digital collectibles would be frozen and that new user registrations would not be accepted.
  • The platform said authorities had yet to provide clear regulations for non-fungible tokens (NFTs) and that such a lack of clarity presented risks to businesses in the sector.
  • Yucang runs on the Hundsun Chain, built by Shanghai Stock Exchange-listed Hundsun and approved by China’s cyberspace regulator.
  • In a commentary published this month in People’s Daily, a state media mouthpiece, National Press and Publication Administration Blockchain Copyright Director Liu Tianjiao wrote that digital collectibles — the phrase used in China for NFTs — would enjoy copyright protection only after being reviewed.
  • Users of official accounts on WeChat, the popular Chinese messaging app, face disciplinary action, including permanent bans, if they are found to be involved in “flipping” digital collectibles for a quick profit.

Forkast.Insights | What does it mean?

Chinese regulators have yet to establish clear rules for digital collectibles in the country, which has upset many in the industry as it makes it hard to run NFT-related businesses.

Tencent-owned social media giant WeChat — a major communications and community-building tool for NFT projects in China — is following prevailing and oft-expressed sentiment that Chinese regulators will probably not tolerate the flipping of NFTs, and they are already censoring content related to NFT trading.

But digital collectibles are still being traded in China. A Beijing-based lawyer told Forkast that Yucang’s decision to repurchase assets might not be the most legally prudent course if it amounts to running a secondary marketplace, which could spark concerns over whether repurchasing constitutes a form of guaranteed break-even investment, which could fall foul of regulators.

Analysts from multiple Chinese securities firms are suggesting in recent research notes that “de-financialization” may be a key regulatory approach when it comes to China’s NFT market. Caitong Securities analysts said in a report on Sunday that the hype around digital collectibles might be dying down, as some items released last week on tech giants’ platforms, including Tencent’s Huanhe, had not immediately sold out as other NFTs had in the past.

As regulatory uncertainty persists and the fallout of China’s Covid lockdowns continues to linger, a number of Web 3.0 companies are already leaving the country for jurisdictions that have clearer and friendlier regulatory frameworks toward digital assets, Forkast has learned. China will need to act quickly to get facilitative regulation in place if it wants to make a mark on the evolution of Web 3.0, let alone set any kind of agenda in the space.


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