In a shocking turn of events, crypto hedge fund Three Arrows Capital (3AC) co-founder Su Zhu was arrested at Singapore's Changi Airport on Friday while attempting to leave the country. This comes after Zhu and his fellow 3AC co-founder Kyle Davies were sentenced in absentia earlier this week to four months in prison for failing to cooperate with liquidators investigating the fund's massive collapse.
The arrest marks a dramatic fall for Zhu, once considered a rising star in the crypto world. Along with Davies, he founded 3AC in 2012 and quickly grew it into one of the largest and most influential crypto hedge funds, managing an estimated $10 billion in assets at its peak.
But 3AC's fortunes turned earlier this year when it was caught up in the implosion of the Terra/Luna ecosystem. The resulting market turmoil led to cascading losses and margin calls that 3AC could not meet. In June, the fund filed for bankruptcy after failing to repay a $670 million loan to crypto lender Celsius Network.
3AC's failure sent shockwaves through the crypto industry. Major companies such as Voyager Digital and Genesis Asia Pacific were exposed to 3AC and subsequently filed for bankruptcy themselves. The crypto market was plunged into a prolonged bear market that persists to this day.
Now Zhu faces serious legal consequences for 3AC's actions. Teneo, the court-appointed liquidator investigating 3AC's collapse, accused Zhu and Davies of taking on additional debt in 3AC's final months despite knowing the fund was already insolvent.
On September 25th, a Singapore court granted Teneo's request for a "committal order" sentencing the two founders to four months in prison for failing to cooperate with the investigation. But before he could be imprisoned, Zhu tried to flee the country. He was apprehended by authorities on Friday at Changi Airport in Singapore.
Davies' whereabouts are currently unknown, according to Teneo.
What this means for Three Arrows Capital
With Zhu now detained, liquidators will be able to fully question him about 3AC's activities leading up to its failure as they work to recover assets for creditors. Teneo has said it will "pursue all opportunities" to compel Zhu's cooperation during his imprisonment.
The arrest also deals a symbolic blow to the impunity crypto moguls have sometimes enjoyed in the past. Regulators worldwide are now cracking down on the sector after a series of high-profile blowups.
Earlier in September, Singapore's financial regulator banned Zhu and Davies from regulated investment activities for nine years. Other countries like the U.S. are also imposing stricter rules and looking to prosecute crypto executives for wrongdoing.
How decentralization could have prevented this
3AC's centralized structure allowed its founders to take on huge risks without oversight. In a decentralized model like Bitcoin, irresponsible risk-taking is limited because funds are not controlled by a single entity.
Decentralization spreads power among many participants, establishing checks and balances against fraud or excessive speculation. It also provides transparency, allowing investors to monitor fund activities on a blockchain.
While decentralization comes with tradeoffs, the crypto sector may need to embrace elements of it to prevent cascading failures like 3AC's from infecting the entire market. Responsibility and risk-taking need to be better aligned.
What comes next
It remains to be seen whether Teneo can recover significant assets for 3AC's creditors. The founders allegedly transferred large sums to new entities before the fund's collapse. But Zhu's arrest means liquidators now have key leverage to follow the money trail.
There are also looming questions around potential criminal charges. Singapore's Commercial Affairs Department is investigating 3AC. If evidence of fraud emerges, prosecutors may file criminal counts that lead to even stiffer penalties against Zhu.
Meanwhile, the crypto market meltdown sparked by 3AC's failure remains ongoing. Total market capitalization has plunged from over $3 trillion to around $950 billion over the last year. The arrest of one of crypto's former star traders is a symbolic moment reflecting how far the industry has fallen.
While crypto will likely recover eventually, investor trust needs to be rebuilt through better transparency, regulation, and accountability. The "move fast and break things" ethos has led to severe consequences. Zhu's arrest is one bookend marking a painful chapter for the industry.
Should I invest in crypto right now?
The crypto market is extremely volatile and risky at the moment. Prices have plunged, highly leveraged trading remains common, and regulations are still evolving. Investors need to approach crypto with extreme caution.
That said, for believers in the long-term promise of blockchain technology, compelling buying opportunities may exist. Bitcoin is down about 70% from its all-time high, presenting a discounted entry point for dollar-cost averaging. Conservative allocations to top cryptocurrencies can let investors capitalize on an eventual rebound while limiting downside exposure.
Above all, good risk management is essential. Crypto investments should be a small portion of an overall diversified portfolio based on individual risk tolerance. Cost basis and holdings should be monitored closely given crypto's volatility. While regulatory scrutiny has increased, investors still largely need to "do their own research" when evaluating projects.
In moderation, crypto can offer differentiated exposures that make sense as part of a complete investment plan. But investing responsibly is crucial after a period defined by irrational exuberance. The sector's growing pains are far from over.
How will Web3 evolve security and privacy?
Web3 injects unique complexities regarding data security, identity protection, and privacy rights. Blockchains are transparent ledgers where transactions are viewable to all participants. Ethereum and competitors also allow decentralized apps to access user information.
New protocols are emerging to address these concerns. Zero-knowledge proofs, trusted execution environments, and innovations in multi-party computation can enable privacy-preserving interactions. Encryption and permissioned chains limit transparency. Users may soon manage multiple on-chain identities to compartmentalize activities.
Overall, Web3's open ecosystems require both greater individual vigilance and collective accountability around security issues. But if done right, users could gain more control over their own data. Privacy may be less about secrecy than selectively disclosing information across decentralized networks. The work on Web3's privacy puzzle remains ongoing.