Hiltzik: The victims of the collapse of the crypto firm Celsius

Last September, Alex Mashinsky was riding high.

Appearing on a panel sponsored by Johns Hopkins University to talk about bitcoin and other cryptocurrencies, Mashinsky, CEO of cryptobanking firm Celsius, exuded confidence in the future of crypto and disdain for traditional banks and traditional currencies.

“The banks have abused their power,” Mashinsky said, citing the discrepancy between the interest that banks pay on dollar deposits — an annual rate of less than 1% — and the nearly 9% that Celsius paid on deposits in some digital currencies. “Is the real value of money 0.1%?” he asked. “Or is the real value of money … 8.8%?”

For hundreds of Celsius’ 1.7 million customers, the value of the $11.7 billion in assets they deposited with the firm might as well be zero.

“Mashinsky always talked very confidently about how strong Celsius was and how much better than banks,” recalls Harold M. Lott, 35, a Nashville-area nurse who had as much as $14,000 in cryptocurrency assets deposited into Celsius at the top of the crypto. market.

“He never gave any indication that there was a problem,” says Lott. “But suddenly, out of the blue, they just stopped all transfers.”

It was June 12, when the company froze all customer withdrawals and other transactions. On July 13, Celsius filed for bankruptcy protection, revealing that it owed customers $4.7 billion but only had $170 million in cash. All told, the company declared a $1.2 billion discrepancy between its assets and liabilities.

Lott is among hundreds of small investors who have written to Bankruptcy Court Judge Martin Glenn, who is overseeing the case, to ask for their money to come out of legal purgatory.

They are retirees, small business owners, regular workers. They’ve been saving for retirement or to buy a home or send their kids to college — funds they fear will be gone forever. They write about being ashamed, depressed and suicidal.

In general, the letters open a window into the dangers of investing in the volatile cryptocurrency markets, or with firms that lack extensive experience serving clients and operate without the government safeguards afforded to traditional bank depositors and stock and bond investors.

Well-heeled investors can play the unregistered securities markets and stake their money with hedge funds, private equity firms and private placements, but the law requires them to be “qualified” or “accredited” — generally, that they can show investment promoters a net worth of at least $1 million or annual income of at least $200,000.

Crypto has not been treated as an investment that warrants such oversight. On the contrary, it has been presented to small investors. Fidelity Investments even offers employers a way to allow workers to invest their 401(k) retirement funds in cryptocurrencies.

The investment class has been promoted through mass media, including through Super Bowl commercials featuring Matt Damon and Larry David.

Their theme is that the average man and woman finally has a way to be launched on an asset destined to dominate the financial world of the future and a chance to get back at the banks and brokerages that have shortchanged them for years.

However, the targeted customers may lack the resources to sustain them during a downturn or to rebuild their wealth after a loss. They are outside investments, which will likely be near the end of the payback line in the Celsius bankruptcy, if there is anything left at all to cover a payback.

The insiders can do much better. Celsius’ bankruptcy filing says the payroll for top executives, including Mashinsky, comes to $730,833 a week, or more than $38 million on an annual basis. There is no indication that the company plans to reduce this unless the judge orders it.

A Rancho Cucamonga man told the judge that the possible loss of his family’s nest egg has driven him to drink and to the point where his wife of 17 years “asked me to leave our home because of my emotional turmoil and unpredictability… I don’t know how to express the guilt, frustration, shame, self-doubt and absolute anger that I feel regarding the burden I have caused and placed on my family.”

The letters have come from all over the United States and from abroad. Many are anonymous. Some are asking Glenn to order their accounts to be released, others are expressing resignation that their money is gone as unsecured creditors to a firm that only has enough assets on hand to cover a tiny fraction of what it owes.

According to the bankruptcy filing, the largest amount owed to a single customer is $40.6 million (the customer is unidentified), but the letter writers generally appear to be owed amounts in the four, five or six figures.

One who identified himself only as “Andrew” told Glenn he had deposited $125,000, “a significant chunk of his life savings.”

Like other depositors, he asked Celsius this spring about rumors that the company was in financial trouble due to a crash in the crypto markets, only to receive assurances from Mashinsky that everything was fine: “We understand that these are turbulent times, but it also reminds us of the foundation on which we have built Celsius and the belief in unlocking financial freedom with crypto for the long term.”

Andrew wrote: “I wish I had the financial freedom suggested in this statement right now – instead, like tens of thousands of users, we don’t have access to our funds that we thought were ours to withdraw or transfer at any time . This is the exact opposite of financial freedom – more like financial imprisonment, or worse for many … financial death.”

Many of the depositors are not focusing on the crypto markets, but on Mashinsky. “He’s a very good speaker,” said Brandon Lawrence, an information technology worker in Los Angeles.

Lawrence deposited two bitcoins with Celsius worth about $52,000 at the time – investments he had bought by taking out a margin loan from brokerage firm Robinhood Markets.

He figured that the interest return he would earn from Celsius would more than cover the interest on the margin loan, but now he still owes the margin interest but gets nothing from Celsius.

“I’m one of the little guys,” Lawrence, 35, wrote to the judge. “It was my nest egg,” he wrote. “Now when I go to work, I drink water and eat leftovers I can find for lunch… I’m in a deep depression and I don’t know if I can get out of this.”

Many Celsius customers were lured by lavish interest rates offered by a program where they would allow Celsius to lend their crypto deposits to others.

The claimed returns to customers from these transactions ran to more than 18% on some cryptocurrencies – an obvious bounty compared to the tenths of a percent interest paid by conventional banks on cash deposits.

A former money manager for Celsius has charged in court that the scheme was essentially a Ponzi scheme, where money for the high interest payments came from assets deposited by later clients.

The problems began as early as January 2021, according to manager Jason Stone. At the time, the value of the digital currency ethereum rose, increasing Celsius’ liabilities to customers who had deposited ethereum. But Celsius did not have enough Ethereum to cover its obligations.

“Faced with a liquidity crisis, Celsius began offering double-digit interest rates to entice new depositors, whose funds were used to repay previous depositors and creditors,” Stone’s lawsuit says. “As Celsius continued to market itself as a transparent and well-capitalized business, it had effectively become a Ponzi scheme.”

In a bankruptcy filing, Mashinsky said Celsius “strongly disagrees with the allegations” made by Stone and intends to defend itself against them “vigorously.”

Mashinsky was a ubiquitous promoter of the purported virtues of digital currency, appearing frequently on social media.

At the Johns Hopkins panel, sponsored by the university’s Alexander Grass Humanities Institute, he contrasted the ability of central banks to manage their economies by printing more of their own nations’ currencies with the hard limit on how many bitcoins can ever be issued, based on the digital the algorithm it is based on.

(The other members of the panel were Lee Reiners of Duke Law School, economist Amy Crews Cutts, and myself — all crypto-skeptics.)

“Because you’re printing unlimited amounts of dollars,” Mashinsky said, “more and more people are choosing to get away from that dollar denomination.” When the dollar declines in value, he argued, “you have an increase in value in an asset that has a limited supply.”

This was a textbook crypto game, trading warnings of the inevitable crash of state-backed currencies for assurances of an equally inevitable rise in the value of digital currencies.

Mashinsky offered more to clients – confirmation that his firm was so well capitalized that their money was safer with Celsius than with traditional banks. His mantra, printed on a T-shirt he wore to a conference, was “Banks are not your friends”.

At the event, his assurances gripped cryptocurrency believers and non-believers alike. “I only used their platform as a checking account because they paid better interest than a bank would,” says one customer, a below-the-line Hollywood worker (one of the legion of technicians and others without whom no movie or TV show would come to the screen) who wrote to Judge Glenn asking to remain anonymous.

This client held primarily US dollars in his account, collecting 7% to 9% in an effort to keep up with inflation. “Mashinsky would go on the Internet weekly and say, ‘Your money is safer here than in a bank.’ He made everyone believe it was a safe place. But they lied and they lost everyone’s money. I didn’t even invest there, just let my money sit there.”

He is now out $40,000 in US dollars and $10,000 in crypto, leaving him to pay this month’s rent. “I’m honestly not a big believer in crypto,” he told me.

Lawrence has the opposite opinion. “I still feel bullish on bitcoin,” he told me. “I don’t like the idea of ​​how the US creates money by printing. I like the fact that bitcoin has responsibility.” He sees bitcoin as a counterweight to “the establishment that makes so many mistakes. The real problem is greed and the mismanagement of Celsius. Krypto is not to blame. I might be down most of my money right now, but there’s a bump in the road.”