A crypto giant froze their accounts. Now the customers are asking a judge for their money back. – Mother Jones

Mother Jones illustration; Getty

Before Celsius archived before filing for bankruptcy last month, the company seemed optimistic about the future. In a June 7 blog post titled “Damn the Torpedoes, Full Speed ​​Ahead,” the crypto-lending firm took aim at the “vocal actors” who were “spreading misinformation and confusion.” It assured customers it was “online 24–7” and said it continued to “process withdrawals without delay.”

Celsius – which offers bank-like services for crypto enthusiasts, including the ability to earn sensational interest by staking digital assets and the ability to borrow against crypto – boasted that it had “one of the best risk management teams in the world.”

“We’ve weathered crypto downturns before (this is our fourth!),” the company assured consumers. “Celsius is prepared.”

Five days later, Celsius stopped all customer withdrawals – a move that essentially froze the assets of its hundreds of thousands of users. A month after that, Celsius filed for bankruptcy. During the bankruptcy proceedings, it became clear that the company does not offer the same protection as traditional banks. Since 2019, “the Company has been clear” that it may have to temporarily or permanently pause withdrawals due to a number of potential circumstances, Celsius CEO Alex Mashinsky wrote in a legal statement. When customers deposit their savings with Celsius, “they transfer ‘all right and title’ of crypto-assets to Celsius,” he said.

According to a presentation filed in court, Celsius now hopes to offer its customers a choice: accept a cash payment worth only a fraction of their investment, or choose to “remain ‘long’ crypto” — that is, continue to hold their digital currency on Celsius ‘ books in the hope of eventually getting their money back.

That offer may not be enough to satisfy Celsius’ depositors, many of whom have run into big trouble after putting their trust in the company. Dozens of customers have described their situation in letters to the bankruptcy judge handling Celsius’ case.

“My savings were in Celsius,” wrote one depositor last month. “I pray and hope every day you do everything in your power to return deposits back to customers. I can’t tell my wife and kids that our retirement and dreams have been stolen from us. Life is stale, we need updates and silence is not the answer.”

Crypto can be a cumbersome asset. There are thousands of different digital currencies, and transferring them from one owner to another is sometimes difficult – thanks to fees and long processing times. It can also be challenging to buy or sell crypto in exchange for traditional money. Unlike with other assets, such as homes, it is difficult for crypto owners to borrow against their holdings. And while ownership of a crypto-asset is recorded in what is called a distributed ledger, this record does not correspond to a person, but rather to a specific code stored on a computer. That means it can be easy to lose, especially if an investor is not technologically sophisticated.

Companies like Celsius were created to solve these problems, making it easier for consumers to build their finances around crypto. Celsius tried to present itself as a consumer-friendly alternative to a predatory financial industry – the company used the slogan “unbank yourself”. Mashinsky was something of a populist figure and often wore a shirt that said “Banks are not your friends”. He would conduct weekly live streams with customers, which the company called “the community.”

As the value of crypto exploded in recent years, financial regulators couldn’t keep up. Although Celsius does many of the things a bank does, such as making loans and paying interest to depositors, it did not register with government regulators, which meant customers did not have access to the same disclosures they would have received if they had business with a more traditional financial institution.

Celsius experienced rapid growth in tandem with rising crypto prices, the bankruptcy filings say. That early success “was not without hiccups,” Mashinsky wrote in a lawsuit. Celsius reinvests customers’ deposits in an effort to make money, and the company “made what in retrospect turned out to be certain poor asset allocation decisions.” The company had sought to “correct the size of these liabilities” starting in 2021, Mashinsky continued. Then, in 2022, crypto prices plummeted. Customers began withdrawing their money, and Celsius found itself unable to liquidate its own investments quickly enough to meet customer demand. Eventually, the company stopped withdrawals and then declared bankruptcy.

Other court cases paint a bleaker picture. Several state regulators have alleged that Celsius, by allowing customers to open accounts, was offering an illegal “unregistered security.” The state of Vermont’s Department of Financial Regulation issued a consumer alert last month warning that Celsius’ “assets and investments are likely to be insufficient to cover its outstanding obligations” and that “Celsius deployed customer funds in a variety of risky and illiquid investments, trading and lending activities.”

In a separate lawsuit against Celsius, KeyFi, a company that provided investment services for Celsius, alleges that Celsius “operated a Ponzi scheme,” that it manipulated the value of its holdings and that it lacked proper risk controls. Subsequent CNBC reporting claimed that Celsius had a risk management team of just three full-time employees, a number that a former Celsius employee described as “too small”. Celsius declined to comment to CNBC and did not respond to questions from Mother Jones.

In their letters to the bankruptcy judge, Celsius customers have said they were first drawn to the company because of its anti-Wall Street ethos. “I felt it was a safe assessment,” wrote one. “Many of the pitches from Celsius, for example: ‘Remove yourself’ and ‘Banks are not your friends’ made sense as they moved into a new world of digital money systems.”

Some mentioned that they found Celsius’ communication on social media, such as the weekly live streams, particularly compelling. “This company presented itself as a safe alternative to a bank that cared about its community,” another customer wrote.

Celsius eventually failed that society. A number of customers parked significant parts of their savings with the company, the letters show. Now, with Celsius halting withdrawals, those assets are in limbo. “I am a Celsius customer with just over $15,000 worth of deposits locked up in Celsius,” one letter said. “$15,000 may not mean much to some people, but it’s about 65% of my savings.”

For some, the problems with Celsius have done little to dampen their general enthusiasm for cryptocurrency. “I’m a long-term HODLer,” one letter says, using a slang term for people who hold onto their cryptocurrency during market swings and expect it to increase in value over time. “If there were guarantees of full recovery of funds in my accounts, I would choose to HODL for the foreseeable future, as this investment was a long-term holding play.”

As part of the bankruptcy process, Celsius hopes to “take care of its global community,” Mashinsky wrote to the court. But the company has many other creditors who are not customers and may have stronger claims on its assets, bankruptcy experts told Reuters. In any case, it can take years for bankruptcy proceedings to take place. With their accounts frozen and no guarantee that the process will be resolved in their favor, some Celsius customers are becoming anxious.

“Every Monday I received a notification from my Celsius application that interest was paid back to me and I felt a sense of pride in growing nest eggs,” wrote one customer. “The money is now being held hostage by Celsius and this has greatly damaged my family. Every day since June 13, 2022 I have gotten up and felt terrible for part of the day. I look at my children and think how the money that Celsius took from me could be used to improve their lives.”