Three Arrows Capital and the War on Bitcoin

The protracted collapse of Three Arrows Capital (3AC) is being treated as a sign of great malaise in the digital asset industry – and it should be. As spectacular as the unfolding of this event has been, it has obscured a scandal within a scandal – one implicating the Digital Currency Group (DGC) and the vast network of business interests it has lined up against the success of Bitcoin.

DCG is a digital asset-focused venture capital group founded by Barry Silbert in 2015. If you haven’t heard of them, you’ve probably heard of their interests: the company has early stakes in Shapeshift, Bitpay, Blockstream, Coinbase (NASDAQ) : COIN), Circle, Ripple, Lightning Labs and too many more to list here. The investments extend beyond tech projects and into “crypto” media, with DCG also owning CoinDesk.

The DCG portfolio is managed by Grayscale Investments and Genesis trading, both created by Silbert. Grayscale’s name is well known because of the infamous Grayscale Bitcoin Trust (GBTC) it created; GBTC is a digital investment product that in theory allows investors to gain exposure to digital assets via a security (GBTC) without having to purchase the underlying assets. Where GBTC trades at a discount to its net asset value (NAV), it creates an arbitrage opportunity to buy exposure to BTC for less than if you bought the asset outright.

That so many of the industry’s biggest names are rooted in DCG is strange, because DCG itself is largely funded by legacy payment providers and old money: Mastercard (NASDAQ: MA ), Bain Capital, Transamerica Ventures, CME Ventures and FirstMark Capital. Given that the industry created from a famous white paper that envisioned a revolutionary system of trustless electronic cash, the DCG’s stated mission would seem at odds with its financiers.

Arrangement

Anything else runs counter to DCG’s purported mission to advance the digital asset industry. Financial blogger DataFinnovation, using documents filed in 3AC’s bankruptcy proceedings, uncovered a potential scheme between DCG and 3AC to exploit the fluctuating price of GBTC – a scheme that, if true, directly led to 3AC’s collapse (and the collapse of anyone with enough exposure to 3AC, such as Voyager Digital).

The blogger is careful not to draw any hasty conclusions. However, he presents enough pieces to make an educated guess as to what 3AC and DCG have been up to.

Got requests for a clearer version. Fairly long and detailed medium post done:

— Data Finnovation (@DataFinnovation) 24 July 2022

3AC would borrow BTC from Genesis, which it then sends back to Genesis to create GBTC shares. That BTC is locked into Trust by Grayscale, which sends GBTC to 3AC. It used these new GBTC shares as collateral to take out USD loans from Genesis – loans that, if the GBTC shares continued to trade at a premium to NAV, would be worth more than the BTC they originally borrowed. If the value of GBTC had slipped below NAV, then 3AC is doubly screwed – which is exactly what happened when LUNA crashed and took the rest of the market – GBTC included – with it.

DCG presumably collects money from the fees associated with these trades.

If that’s what it looks like, the scheme is strangely rude and reckless. There are more eyes on the digital asset industry than ever before, and with the sample of breadcrumbs left behind by public SEC filings, it was bound to be exposed. But in light of DCG’s origins in legacy industry and concerted efforts to prevent the project described in the white paper from coming to fruition, the recklessness is not such a surprise.

After all, what could be further from Satoshi’s vision for workable, peer-to-peer electronic cash than the kind of circular, highly leveraged gamble that 3AC did with GBTC?

Why?

This arrangement speaks to a particular philosophy to which Silbert, DCG and its wide and carefully cultivated network subscribe. It’s a philosophy of exploiting the nascent industry for personal gain rather than expending effort to do what is necessary for it to see mainstream (read: regulatory) acceptance.

More than that, this philosophy compels these companies to attack those who would prove that Bitcoin was designed to deliver fast, cheap transactions at scale within the bounds of the law. If Bitcoin can do all these things, not only is DCG not needed, neither are its benefactors – the Mastercards of the world. Therefore, BSV – the only implementation of Bitcoin described in the white paper – and Craig Wright are public enemies #1 and #2.

Take the DGC-backed Blockstream as an example. Blockstream was founded by Adam Back as a blockchain technology company. But Blockstream is not about blockchain or even Bitcoin – quite the opposite. In Back’s own words (confirmed by him), Blockstream’s mission is to “sell sidechains to businesses, charge a fixed monthly fee, take the transaction fees, and even sell hardware.”

that is correct, and an accurate quote.

— Adam Back (@adam3us) 25 October 2017

Sidechains are unnecessary and have been since Bitcoin was first introduced to the world. Blockstream’s flagship Liquid sidechain is the best example of this: according to Blockstream’s selling point for Liquid, it is the ‘fix’ for what it calls Bitcoin’s ‘high latency’ and ‘limited volume’ capability.

That Blockstream would be opposed to Craig Wright and BSV makes specific sense. Their business depends on being able to sell a solution to a problem that doesn’t exist (and never existed within Bitcoin). Bitcoin was always designed to scale, as has been proven time and time again by BSV. And contrary to those who push the narrative that it does not scaleBSV is designed and built to work within the law rather than circumvent it.

To see how much of an existential threat a pro-law and pro-regulation Bitcoin poses to this network, note how many of them have already been the subject of law enforcement.

DCG’s founder and CEO, Barry Silbert, was the subject of SEC action in 2016 for using his name to promote and manipulate scam coin BIT.

Shapeshift, in which Silbert and DCG were early investors, is run by Erik Voorhees, who in many ways embodies this particular cartel’s vision. For example, in 2018, a Wall Street Journal investigation of $88.6 million in illicit funds found that $9 million went to Shapeshift. The problem of black money being channeled through legitimate or quasi-legitimate exchanges is so well-known that it’s impossible to deny, but Voorhees came out strongly against the report. For Voorhees, highlighting this flow of illicit funds is an “anti-crypto, pro-bank surveillance agenda”.

Or look at the Liquid Federation, the group of digital asset companies handpicked by Blockstream to validate the sidechain’s transactions. For this, Blockstream chose such upstanding citizens as BitMEX (whose founders pleaded guilty to facilitating money laundering earlier this year) and Bitfinex (whose role in facilitating Tether’s ongoing fraud led to it being banned from doing business in New York).

Shapeshift and Coinbase both collaborated to remove BSV more or less simultaneously and encouraged other exchanges to do the same. Both Binance and Kraken were also involved in the coordinated delisting attack against BSV. Coinbase and Blockstream both sit on the board of the Jack Dorsey-led Crypto Open Patent Alliance, which has turned out to be little more than a vehicle for suing Dr. Craig Wright, author of the Bitcoin White Paper.

So, this existential threat being what it is, it should also come as no surprise that the platforms that DCG’s money founded have gone out of their way to make BSV fail. Nor should it be a surprise that the DCG would be involved in the sort of laundering scheme that DataFinnovation alleges: where there is opposition to Dr Wright and the BSV, it can almost certainly be the result of a desire to keep the law out of the industry and away from schemes for personal enrichment.

See: BSV Global Blockchain Convention panel, Law & Order: Regulatory Compliance for Blockchain & Digital Assets

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