Crypto lender Celsius looked a lot like a Ponzi, state regulator says
For at least two years before its collapse, cryptocurrency lender Celsius Network operated what could resemble a Ponzi scheme, the Vermont Department of Financial Regulation alleged in a lawsuit.
The state’s securities regulator wrote in support of a motion filed by the US Trustee’s Office asking the judge overseeing Celsius’ bankruptcy to appoint an independent examiner.
The Trustee Office, a branch of the Ministry of Justice responsible for bankruptcies, wants an independent investigation into what it calls “significant transparency issues” surrounding the case. But Vermont’s latest filing adds some major allegations to the debacle.
First, that Celsius had gone up in smoke long before the crypto winter. Management “kept its huge losses, asset deficits and deteriorating financial condition a secret from investors”, it claims, with Celsius never earning the revenue needed to support the returns it promised:
This shows a high level of financial mismanagement and also suggests that, at least at some points in time, the returns to existing investors were probably paid with the assets of new investors.
Second, Vermont claims that Celsius used its original CEL token as balancing ballast:
Credible allegations have been asserted publicly, through letters to this court and otherwise, that Celsius and its management engaged in improper manipulation of the price of the CEL token, including by using the proceeds of investor deposits to acquire CEL tokens and increase its net position in CEL
By increasing its net position in CEL by hundreds of millions of dollars, Celsius increased and supported the market price of CEL, thereby artificially inflating the company’s CEL holdings on its balance sheet and accounts. Excluding the company’s net position in CEL, its liabilities would have exceeded its assets since at least February 28, 2019. These practices may have also enriched Celsius insiders, at the expense of retail investors.
But even with CEL reserves included, reported liabilities still exceeded a yard’s assets as the end approached.
Third, Vermont alleges that Celsius and its CEO Alex Mashinsky repeatedly claimed robust health even as they booked “catastrophic losses.” To drive home the point, the archive juxtaposes some rosy tweets with the uglier reality.
On May 11, 2022, Mashinsky tweeted:
Despite the extreme market volatility, Celsius has not experienced any significant losses and all funds are safe.
— Alex Mashinsky (@Mashinsky) 11 May 2022
When it actually is:
Preliminary internal financial records provided by Celsius to members of the multi-state regulatory group show that Celsius experienced unrealized losses of approximately $454,074,042 between May 2 and May 12, 2022. The company was insolvent and depositor funds were not safe.
On July 31, 2021, Mashinsky tweeted:
The other guys have to raise money every few months because they subsidize their already low prices and make all their income from fees.
So Celsius is profitable and always acts in the best interest of its users while Blockfi has hidden fees and charges you commissions for every move.
— Alex Mashinsky (@Mashinsky) 31 July 2021
But really . . .
In fact, a preliminary analysis of financial records provided to the multi-state regulatory group indicates that Celsius experienced huge losses during the first seven months of 2021. It also experienced two significant adverse events in June and July 2021.
Forty state regulators are now looking into Celsius’ business and financial history, the filing also reveals. Too late, unfortunately.
Further reading:
Inside Celsius: how one of crypto’s biggest lenders stalled – FT
FTAV’s cryptocrypt.
