SINGAPORE - The collapse of Singapore-based cryptocurrency hedge fund Three Arrows Capital is dragging crypto broker Genesis Trading into the financial mire as well.
New York-based firm Genesis faces "hundreds of millions" of dollars in potential losses due to exposure to Three Arrows, or 3AC, and crypto financial services provider Babel Finance, CoinDesk noted on Thursday (June 30).
Genesis Trading is owned by Digital Currency Group, the same company behind CoinDesk.
The report comes a day after news that 3AC, one of the major hedge fund players in crypto, was ordered on Monday (June 27) by a British Virgin Islands court to liquidate after creditors sued it for failing to pay its debts.
Founded in 2012 by Mr Zhu Su and Mr Kyle Davies, 3AC is incorporated in the British Virgin Islands.
Teneo Restructuring is reportedly managing the liquidation process.
The plunge in cryptocurrency prices in recent weeks has wiped out billions of dollars in value and sent the total market capitalisation under US$900 billion (S$1.25 trillion) - a threshold that has shocked investors.
Prices fell after the crash of Singapore-based Terraform Labs' algorithmic stablecoin TerraUSD and affiliate token Luna in early May, both of which 3AC was exposed to as a key backer of Terraform.
Investors spooked by surging inflation, rising interest rates and fears over global growth fled the market, which in turn triggered a liquidity crisis that has engulfed big names in the business such as crypto lenders Celsius and BlockFi.
The cascading impact from 3AC is being widely felt.
Crypto broker Voyager Digital issued 3AC with a default notice on Monday after it failed to make payments on a loan of 15,250 Bitcoin (about US$324 million) and US$350 million worth of stablecoin USDC.
Earlier this month, The Financial Times said BlockFi and Genesis had liquidated some of 3AC's positions.
3AC had borrowed from BlockFi but was unable to meet the margin call.
On June 17, Genesis chief executive Michael Moro confirmed that "a large counterparty" had failed to meet a margin call but no client funds were impacted.
Crypto firm Babel, which was valued at US$2 billion in late May, has declined comment.
It suspended withdrawals two weeks ago due to extreme market conditions and liquidity pressures.
Earlier this month, it said it reached preliminary agreements with counterparties on some debt repayments.
Mr Willie Tanoto, financial institutions director at Fitch Ratings Asia-Pacific, said the various crypto players and blockchains have unregulated and leveraged exposures to one another.
"The market value of crypto assets has fallen by some 70 per cent from its peak and the magnitude of such losses means they very likely exceeded typical collateral margins and internal provisions against credit losses that are in place," he added.
Moreover, when there are outsized losses that are compounded with leverage, it is inevitable that losses will need to be borne by not just the primary holders but also by their lenders, depositors and credit counterparties, said Mr Tanoto.
He added that while there could be indirect repercussions - something that could happen for any asset class - conventional markets have more established regulations and better disclosures to better manage risks.
