Seven months ago, the collapse of Kyle Davies and Su Zhu’s cryptocurrency hedge fund, Three Arrows Capital, helped set off a massive crypto crash that evaporated $1.46 trillion in market value in a matter of months.
But in a dramatic comeback, Davies and Zhu have already announced the launch of a new crypto venture, which has raised $25 million.
Their well-capitalized rebirth is not a novelty in the crypto world. Less than a year after their companies went belly-up, top crypto executives are back at the top of other firms, even as their former customers are fighting to recoup even a fraction of the billions of dollars they lost.
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Jason Harrow, an attorney at a new civil rights firm that specializes in crypto consumer protection, said he wasn’t surprised, because the crypto industry doesn’t operate under the same regulations as other financial industries.
“Obviously there's been a wave of new crypto enforcement but it’s in its early days,” he said. “These things have started to go up and down without the same consequences as other industries, so these folks can rinse and repeat.”
“It’s not surprising because it’s been really difficult to hold these folks accountable.”
Broken ‘Arrows’
Three Arrows collapsed in July following a death plunge in the value of the Luna token, in which the company was heavily invested. The company’s fall completely destroyed digital asset brokerage Voyager Digital—which lost an estimated $670 million in loans to Three Arrows and filed for bankruptcy protection the next month—and severely wounded several others. When it crashed, Three Arrows owed an estimated $3.5 billion to 27 companies, briefly making Zhu and Davies public enemies in the crypto world. (It didn’t help that lawyers for the company’s creditors struggled to locate them for weeks following the bankruptcy filing.)
This month, the pair announced the creation of their new crypto exchange: Open Exchange, which allows customers to trade bankruptcy claims from crypto companies that went belly-up in the market crash—including the founders’ own. Zhu told The Wall Street Journal the company has raised at least $25 million in investments for the platform, which plans to launch by the end of the month. The company tweeted last week that there were already more than 3,600 sign ups.
A pitch deck for Open Exchange leaked late last month boasts of Zhu and Davies turning $1.2 million in investor funding into $4 billion at Three Arrows, before it “went bust.” It claims it will “fill the power vacuum left by FTX” and “dominate the crypto market within 2-3 months of go-live.” The company said it aspires to “lead the global progression toward financial transparency, certainty, and liquidity.”
Liquidators for Three Arrows, meanwhile, said in court filings that the founders were still refusing to cooperate with asset recovery efforts to reimburse creditors, including the sale of a $50 million yacht called “Much Wow” that was allegedly purchased with company money.
“At best, the Founders have made only selective and piecemeal disclosures, and have intentionally disrupted the Foreign Representatives’ attempts to communicate,” the liquidators wrote in another court filing this month. “Put simply, their refusal to cooperate violates their duties owed to Three Arrows.” (Davies responded with a tweet claiming the liquidators had “not engaged with us constructively” and that they would prefer to work together with creditors directly.)
One of the largest creditors to suffer in the Three Arrows bankruptcy was Genesis, a crypto lending firm that allegedly loaned Three Arrows approximately $2.4 billion and never got it back. Genesis leaders claimed their company recovered and was still solvent over the summer, but the collapse of Sam Bankman-Fried’s FTX in November dealt a death blow. Genesis suspended customer withdrawals on Nov. 16—five days after FTX went under—and filed for bankruptcy last month, leaving an estimated $5.1 million owed to creditors.
The company was also hit last month with a suit from the SEC claiming it was selling unregulated securities. And the crypto exchange Gemini, a previous business partner, turned on Genesis, claiming its bigwigs had lied about the state of its finances. Gemini named several higher-ups like former CEO Michael Moro, who publicly tweeted after the Three Arrows implosion that Genesis had “carefully and thoughtfully mitigated our losses” and “shed the risk and moved on.” They also mentioned documents in an email from then co-head of sales and trading Matt Ballensweig, which claimed the company had “capital to operate and scale our business for the long-term.
“It was not true that ‘[Genesis’s parent company] has assumed certain liabilities of Genesis,’” Gemini stated in response to a customer lawsuit. “It was not true that Genesis ensured that it had the ‘capital to operate...for the long term.’”
Art of the Comeback
Ballensweig left Genesis in September, following the exit of the company’s CEO and an overhaul of its management. But he reportedly resurfaced again in mid-December, in an email raising money for a new crypto fund called Hunting Hill Digital. According to emails obtained by CNBC, Ballensweig sought $5 million for the new venture—an offshoot of the $718 million hedge fund Hunting Hill.
Ballensweig claimed the fund had already raised $2.5 million from Bessemer Venture Partners—a claim the company denied when contacted by CNBC—and was planning to launch its “flagship product” in the first quarter of 2023. Joining him at the fund were two other former Genesis execs, former managing directors Martin Garcia and Reed Werbitt.
Representatives for Hunting Hill confirmed that Garcia was chief investment officer of Hunting Hill Digital. A spokesperson said the fund had “discussions” with Ballenswieg and Werbitt, but that they never started employment. The company declined to comment on Ballenswieg’s emails.
Ballenswieg and Werbitt did not respond to multiple requests for comment.
Ballensweig, Garcia and Werbitt are not the only ex-Genesis execs to attempt a comeback. Roshun Patel, who left the company in March after more than a year as vice president, started raising money this summer for a new fund, DBA Crypto. An SEC filing from August listed Patel as a general partner alongside former Galaxy Digital Vice President Michael Jordan and quant trader Shanne Barratt, and said they planned to raise $500 million.
In an interview that month, Patel reflected on the “bright side” of the crypto crash, saying: “Now everything is re-priced at a much lower point and moving forward, things look a lot more attractive. We’re excited about the opportunities for the rest of this year.”
The fund’s website, launched on Jan. 3, makes no mention of Patel and Lim. Instead, it says the firm’s aim is to drown out the “grifters and idiots” in the crypto sphere by “elevating the good actors.”
DBA and Patel did not respond to a request for comment.
One industry executive, who asked to remain anonymous, argued that there were employees at these bankrupt companies who were unaware of any bad decisions or malfeasance, and who should be allowed to rebuild their careers in the wake of the collapse.
“Crypto has definitely had its Enron and Lehman moments,” he said. “But if you look at those firms, there were a lot of people involved in running them that were not part of the poor decisions, and … went on to build good businesses.”
“You kind of have to evaluate people on their own merits and not tar them with a single brush,” he added.
‘Hero’s Journey’?
John Jasnoch, an attorney who has filed 10 class actions on behalf of crypto customers, agreed with this sentiment, but said it was too early to determine who had acted maliciously and who had not.
“I think investors should wait for that to come out before investing any money with these people,” he said.
No one can say that Alex Mashinksy was not involved in his company’s demise. The former CEO of crypto bank Celsius, who is now being sued by New York State for allegedly defrauding investors out of billions, also tried to plot his return this fall.
According to a recording obtained by The New York Times, Mashinksy and Chief Compliance Officer Oren Blonstein tried to pitch employees on overhauling Celsius to focus on providing safe storage for users’ crypto assets instead of big returns. Mashinksy reportedly compared Celsius to Delta and Pepsi—two famous brands that went through bankruptcy—and claimed the majority of its users wanted the company to continue. (Celsius owed users $4.7 billion when it went bankrupt, according to court filings from this summer.)
Blonstein, meanwhile, claimed the bankruptcy was all part of the company’s “hero’s journey.”
“This hero has a mission — something that they want to accomplish,” he said in the recording.. “If we are successful, it’s going to be a success story like one that’s never been seen before.”
Mashinksy stepped down as CEO in late September, claiming he had become “a distraction,” but Blonstein remains.
Even FTX—the company that lost $8 billion in a spectacular implosion this fall—is plotting a rally, according to newly appointed CEO John Ray, who is leading the company through its closely watched bankruptcy proceedings. Ray told The Wall Street Journal last month he was considering restraining the crypto exchange in the hopes of recovering some of customers’ lost funds. “Everything is on the table,” he said.
It is highly unlikely that former CEO Bankman Fried would return. He is on house arrest facing charges of securities fraud, wire fraud, money laundering and conspiracy to avoid campaign finance regulations.
Editor's note: This story has been updated with Matt Ballensweig’s correct title and to reflect that the Gemini also named other Genesis higher-ups in its lawsuit response.
