Crypto lender Celsius is a “scam” and “Ponzi scheme”, the lawsuit claims

Crypto lender Celsius artificially inflated the price of its own digital currency, failed to hedge risk and engaged in activities that constituted fraud, a lawsuit claims.

Celsius was sued on Thursday by former investment manager Jason Stone, as the pressure continues to increase on the company in the middle of a crash in cryptocurrency prices.

The lawsuit comes after Celsius, which offers customers an interest in depositing crypto, was forced to stop withdrawals for its users as they face a liquidity crisis.

Celsius was not immediately available for comment on the lawsuit when he was contacted by CNBC.

Celsius acts as a bank by offering customers a return, sometimes as high as almost 19%, if they deposit crypto with the company. Celsius then lends that crypto to others who are willing to pay a high interest rate to borrow. Then it tries to shell out the money to give the return back to the customers.

Stone founded a company called KeyFi that specialized in crypto trading strategies. Celsius and KeyFi concluded a “handshake agreement” in which the latter company would “manage billions of dollars in customers’ crypto deposits in return for a share of the profits generated from these crypto deposits,” the lawsuit claims.

There was “no formal written agreement between the parties”, it is stated in the lawsuit.

From August 2020, Celsius began “transferring hundreds of millions of dollars in cryptocurrencies” to Stone and his team, according to the lawsuit. Celsius set up a wallet on the ethereum blockchain referred to as “0xb1.” This is where the company sent the assets Stone was to distribute, the lawsuit claims.

Stone brings a number of charges against Celsius in the lawsuit.

Celsius and Stone decided to engage in crypto-trading strategies that required an effective hedging strategy to manage risk and protect themselves against price fluctuations on certain digital coins, the lawsuit claims. It adds that Celsius had a full overview of which trading activities KeyFi engaged in.

Stone claims Celsius executives “repeatedly assured” him that the company had entered into the necessary hedging transactions to ensure that price fluctuations on certain cryptocurrencies would not significantly and adversely affect the company or its ability to repay depositors. Stone and his team relied on these representations, the lawsuit adds.

“But these promises were lies. Despite their repeated assurances, Celsius failed to implement basic risk management strategies to protect against the risk of price fluctuations inherent in many of the deployed investment strategies,” the lawsuit claims.

Stone claims that there were “several incidents” in which Celsius’ “failure to perform basic accounting put customer funds at risk.”

Another claim concerns the digital coin called CEL. It is Celsius’ own sign. Celsius says that if users accept the interest payment in the form of CEL, they can earn higher interest rates than those who do not.

However, the lawsuit alleges that Celsius engaged in transactions to artificially inflate the price of CEL.

“The purpose of this scheme was both fraudulent and illegal: Celsius induced customers to be paid in CEL tokens by giving them higher interest rates,” the lawsuit claims. “So by purposefully and artificially inflating the price of the CEL token, Celsius could pay customers who had chosen to receive their interest payments in the form of the CEL token even less of the crypto assets.”

Stone also claims that Celsius boss Alex Mashinsky was “able to enrich himself considerably.”

Finally, Stone claims in the lawsuit that Celsius ran a “Ponzi scheme”.

Due to Celsius’ failure to hedge against trading risk, it had “massive obligations” to depositors denominated in the cryptocurrency eater, but had not maintained holdings in the digital currency equal to these obligations, the lawsuit claims.

When customers tried to withdraw both deposits, Celsius was forced to buy more ether in the open market at high prices (around January 2021) and suffered heavy losses, the lawsuit claims. Stone claims that Celsius then began offering double-digit interest rates to lure in new depositors whose funds were used to repay previous depositors and creditors.

“As Celsius continued to market itself as a transparent and well-capitalized business, it had in fact become a Ponzi scheme,” the lawsuit claims.

Stone left Celsius in March 2021. He claims in the lawsuit that at the time of his resignation Celsius had a gap of $ 100 million to $ 200 million in the balance sheet that “it could not fully explain or resolve.”

He claims that Celsius maintains control over the “0xb1” ethereum wallet and that the CEO of Celsius uses it “for his own personal benefit.”

In one case, Stone claims, Mashinsky transferred valuable non-fungible tokens, or NFTs, from the accounts to his wife’s wallet.