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The crypto industry was “brought to its knees” in the recent weeks by an “old-fashioned Madoff-style Ponzi scheme” wrapped in a trade that was similar to the positions that sunk Long Term Capital Management (LTCM),” research firm FSInsight said in a report Friday looking at the implications of the implosion of cryptocurrency hedge fund Three Arrows Capital (3AC).
Madoff in this scenario would be the founders of 3AC, Su Zhu and Kyle Davies, who used their reputation to “recklessly borrow from just about every institutional lender in the business,” resulting in pain for some high-profile names in the industry, including Voyager Digital, Babel Finance and BlockFi, Sean Farrell, head of digital asset strategy at FSInsight, wrote in the report.
At its peak, 3AC’s assets under management (AUM) were supposedly over $18 billion, the note said. However, given that the amount of debt that is now known to have been loaned to them, it is unclear at this juncture how much actual equity was at risk. It is likely that the pair were simply “using borrowed funds to repay interest on loans issued by lenders, while ‘cooking their books’ to show massive returns on capital,” the note added.
Read more: ‘Staked Ether’ Becomes Focus of Crypto Stress, From Celsius to Three Arrows
Given the size of the exposure that companies like Voyager and…
