Reports are emerging that the venture capital (VC) firm Three Arrows Capital (3AC), which is currently facing an insolvency crisis, habitually offered treasury management services to the companies in its investment portfolio.
According to industry analyst The DeFi Edge (TDE), one of the companies embroiled in the scheme made contact to explain exactly how 3AC’s investment process worked.
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Three Arrows Capital would make an investment and then follow up by offering to help the firm manage its newly raised capital. In return Three Arrows Capital guaranteed returns (8% APR for instance) on all of the funds under its control.
In accountancy this money pile is referred to as the treasury and its proper management, or otherwise, can effectively make or break a business.
As TDE states, “protocols would park the funds raised by 3AC [and] additional parts of their treasury” with Three Arrows Capital.
In effect, an “investment” from Three Arrows Capital would instantly boomerang back under the sole control of Three Arrows Capital, but significantly fattened by additional freshly raised capital from other sources.
At the time the firms involved in the process “felt safe” because they believed their money was being managed by experts in the field. Earning interest from funds that would otherwise depreciate due to inflation proved too alluring for some.
The anonymous source behind the revelation, dubbed Protocol X, has said it is now struggling to make contact or speak to anyone at the beleaguered VC.
“Protocol X has mentioned that the ghosting is real,” explained TDE in a Twitter thread. “They’ve talked to two other protocols who also mentioned that they’re being ghosted too… 3AC now holds part of their treasury, and they have no idea what’s the state of their cash.”
A deepening crisis
Three Arrows Capital is currently in a state of significant financial turmoil despite managing a portfolio of close to $10 billion. Poor investment decisions, including a disastrous $559.6m bet on Terra, have pushed the firm to the brink of insolvency.
As demonstrated by the liquidity crisis at Celsius, which hastened the collapse of Terra, problems in one area of the crypto market have a tendency to spread, infecting other areas of the market like a virus.
Also, much like a virus, it is difficult to predict or to know exactly how far the sickness has travelled.
As The DeFi Edge sums up, “now we’re in a situation where SOME of the protocols [Three Arrows Capital] invested in…their treasuries might be gone.”
All the market can do now is wait to see who sneezes next.
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