Crypto lender Celsius has misused customer funds for years, investigators find

Bankrupt crypto lender Celsius misappropriated investor and customer funds for years before its collapse, including to help its founders withdraw tens of millions of dollars, a court-appointed investigator said in a new report.

The company founded by Alex Mashinsky promoted itself as an innovative, digital asset alternative to traditional banks, luring customers with interest rates as high as 17 percent. But it used the money it received from thousands of everyday investors to inflate the price of its own token, CEL, in a scheme that an employee at the time described as “very Ponzi-like,” according to the report prepared by a law firm appointed by the U.S. the bankruptcy court.

Mashinsky himself profited by dumping $68.7 million of CEL, while telling the public he wasn’t selling. Insider selling by Mashinsky and others, first reported in a Financial Times investigation in July, was made possible by Celsius buying up the token using money from its customers and blue-chip investors, including Laurence Tosi’s WestCap and the Canadian public pension Caisse de dépôt et placement du Québec (CDPQ).

“We spent all our money paying managers and trying to support Alex [Mashinsky]its net worth i [the] CEL token,” a former employee told the examiner, according to the report.

The nearly 700-page report by Jenner & Block partner Shoba Pillay, a former US federal prosecutor, highlights the once-prominent crypto lender’s alleged extensive financial manipulation, misrepresentations, tax deficiencies and woeful internal systems and risk controls.

The findings will raise questions for transatlantic regulators who were closely involved with Celsius long before it collapsed but failed to prevent billions of dollars in customer funds from being locked up. The company was rejected by the UK’s Financial Conduct Authority when it applied for registration as a crypto business and was forced to move its base to the US in 2021, but not blocked from seeking clients. Celsius stopped new US customers from signing up for some of its products in April 2022, just two months before it collapsed, following intervention by US watchdogs.

New York’s attorney general sued Mashinsky this month for allegedly “defrauding hundreds of thousands of investors . . . of cryptocurrency worth billions of dollars”. He has denied wrongdoing. Mashinsky’s attorney did not immediately respond to a request for comment on the investigator’s report.

Beginning in 2020, Celsius operated a scheme it called the “OTC flywheel” in which it bought up CEL on the open market and sold it via private “over the counter” transactions, often timed purchases to boost the price, the report said.

“In total, Celsius spent at least $558 million buying its own token in the market. . . . In fact, Celsius bought every CEL token in the market at least once and in some cases twice,” Pillay wrote.

The report found that Celsius increased its purchases of CEL to allow Mashinsky to cash out of the token. The company’s former chief financial officer expressed concern over the arrangement, according to the report, writing: “[We] talking about becoming a regulated entity and we are doing something that is possibly illegal and definitely not compliant.”

Another employee wrote on the messaging app Slack: “If anyone ever found out where we are and how much our founders took in USD, it could be a very bad look.”

Company executives also compiled a list of alleged miscommunications Mashinsky made in his nonstop marketing efforts for the company, and sometimes edited his regular YouTube broadcasts to clients afterward to remove sensitive statements.

In addition to enriching insiders, the scheme inflated Celsius’ balance sheet by more than $1.5 billion at the top, because the company kept CEL on its balance sheet at market prices, despite “routine” calls from employees in 2022 that CEL was “worthless ” and that the price “should be 0”, says the report.

The CEL scheme saw the seeds of the company’s demise when the 2022 crypto crash and customers pulled out, meaning Celsius could no longer support CEL.

However, the hole in the company’s balance sheet already appeared at the start of 2021, because it did not make enough money from its lending and business lines to finance the interest rates it promised to customers and its CEL purchases, the report said. The investigator described Mashinsky as resisting efforts by some insiders to put the company on a more sustainable footing by reducing payouts to clients.

Celsius filled the hole it discovered in early 2021 by using $300 million in stablecoins to buy and borrow bitcoin and ethereum to match the amount of these tokens it owed to customers. The “net deficit” between the amount of coins Celsius customers had deposited and the amount they actually held increased over time to more than $1 billion.