Bankrupt Three Arrows Capital hedge fund founders Kyle Davies and Zhu Su want to start an exchange where their creditors can buy and sell bad debts — while giving the pair a cut.
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The founders of the bankrupt hedge fund that took a swath of major crypto lenders down with it when their incredibly risky investment strategies exploded are trying to raise money to start an exchange focused on — wait for it — trading distressed debt from those bankrupt firms.
They're looking to raise $25 million, the Wall Street Journal said.
That's $5 million less that the liquidators of Kyle Davies and Zhu Su's Three Arrows Capital (3AC) liquidators hope to get for the "Much Wow" superyacht the pair bought before leaving companies like Voyager Digital, Genesis and BlockFi out nearly $3 billion.
They have partnered with Mark Lamb and Sudhu Arumugam, co-founders of crypto exchange CoinFLEX — which is itself going through a restructuring in the Seychelles that left its creditors owning 65% of the firm.
Off the Top
In a pitch deck seen by the WSJ, Davies and Zhu estimated that there is a $20 billion market for creditor claims against bankrupt crypto institutions. That type of claim is often sold for a small fraction of its face value to deeper-pocketed investors who can wait years for claims to wind their way through courts and assets to be recovered and distributed.
With FTX accounting for an estimated nine million customers and firms like Voyager and crypto lender Celsius hundreds of thousands more, it's a big market.
Building on that base, the pitch deck said the new exchange will fill the "vacuum" left by FTX, adding crypto and eventually stocks, CoinDesk said.
The reception has been decidedly cool in some quarters, with Castle Island Venture founder Nic Carter pouring scorn on the idea:
Starting a Twitter thread with "disgraced fraudsters teaming up with other disgraced fraudsters to trade claims from a collapsed fraudulent exchange. sounds backable," Carter moved on to:
"Got rugged on FTX? Want to get rugged twice over? Come entrust your FTX claims to us. We have a track record of... well, we have a track record."
On a more serious note, he said:
"So these guys want to skim fees from people trading claims against them? — is what I'm getting from this."
Fool Me Twice
Beyond that, any firms that are 3AC creditors and still have faith in Davies and Zhu would have the option of converting their claims into equity in the new firm. The pitch deck named it GTX — a play on FTX — although that might not be the final name.
Evgeny Gaevoy, founder and CEO of crypto market maker Wintermute, also had words to say about the GTX pitch:
"If you are investing into CoinFLEX/3AC 'exchange' you might find it a bit more difficult to work with Wintermute in future. Similarly, we are not going to be participating in venture rounds where these guys are about to enter the cap table, so founders beware."
