Three Arrows Capital (3AC) faces a deadline to repay loans or defaults

Billions of dollars in value have been wiped out of the cryptocurrency market in recent weeks. Businesses in the industry feel the pain. Lending and trading companies are facing a liquidity crisis and many companies have announced layoffs.

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Three Arrows Capital, a cryptocurrency-focused hedge fund, must meet a deadline on Monday to repay more than $ 670 million in loans or default, in a case that could have a ripple effect across the digital asset market.

3AC, as it is also known, is one of the most prominent crypto hedge funds in existence and is known for its high-lending efforts.

But with billions of dollars being wiped out by the digital currency market in recent weeks, the hedge fund faces a potential problem of liquidity and solvency.

Voyager Digital, a digital asset brokerage, said last week that it had borrowed 3AC 15,250 bitcoins and $ 350 million of stablecoin USDC. With Monday’s rates, the total loan is worth more than $ 675 million. Voyager gave Three Arrows Capital until June 24 to repay $ 25 million USDC and the entire outstanding loan by June 27, Monday.

None of these amounts have been repaid, Voyager said last week, adding that they can issue a default notice if 3AC does not repay the money.

Voyager said they “intend to pursue recovery from 3AC” and talk to its advisers “regarding legal remedies available.”

Voyager Digital and Three Arrows Capital were not immediately available for comment when contacted by CNBC.

Voyager, which is listed on the Toronto Stock Exchange, has seen shares plummet 94% this year.

How did 3AC get here?

Three Arrows Capital was established in 2012 by Zhu Su and Kyle Davies.

Zhu is known for his incredibly bullish view of bitcoin. He said last year that the world’s largest cryptocurrency could be worth $ 2.5 million per coin. But in May this year, when the crypto market began its merger, Zhu said on Twitter that his “superbike price thesis was unfortunately wrong.”

The beginning of a new so-called “crypto winter” has damaged digital currency projects and companies across the board.

Three Arrow Capital’s problems appeared to begin earlier this month after Zhu tweeted a rather cryptic statement that the company is “in the process of communicating with relevant parties” and is “fully committed to resolving this”.

The specific problems were not followed up.

But the Financial Times reported after the tweet that US-based crypto borrowers BlockFi and Genesis liquidated some of 3AC’s positions, citing people familiar with the matter. 3AC had borrowed from BlockFi, but failed to meet the margin requirement.

A margin call is a situation where an investor must commit to more funds to avoid losses on a trade made with borrowed cash.

Then the so-called algorithmic stablecoin terraUSD and its sister token luna collapsed.

3AC had exposure to Luna and suffered losses.

“The Terra-Luna situation took us very seriously,” 3AC founder Davies told the Wall Street Journal in an interview earlier this month.

Risk of infection?

Three Arrows Capital continues to face a credit crunch exacerbated by continued pressure on cryptocurrency prices. Bitcoin hovered around the $ 21,000 level on Monday and is down around 53% this year.

Meanwhile, the US Federal Reserve has signaled further interest rate hikes in an attempt to control sharp inflation, which has taken the steam out of more risky assets.

3AC, which is one of the largest cryptocurrency-focused hedge funds, has borrowed large sums of money from various companies and invested across a number of different digital asset projects. This has triggered fears of further infection in the industry.

“The problem is that the value of their [3AC’s] “Assets have also fallen sharply with the market, so all in all, there are no good signs,” Vijay Ayyar, vice president of corporate development and internationally at the Luno crypto exchange, told CNBC.

“What is to be seen is whether there are any major, remaining players who have been exposed to them, which could cause further infection.”

A number of crypto companies are already facing liquidity crises due to the market downturn. This month, the lending company Celsius, which promised users super-high returns for depositing its digital currency, stopped withdrawals for customers, citing “extreme market conditions”.

Another cryptocurrency lender, Babel Finance, said this month that it was “facing unusual liquidity pressures” and stopped withdrawing.

CNBC’s Abigail Ng contributed to this report.