This week a report from Vermont’s Financial Regulation department (VFR) states crypto lending platform Celsius and it’s CEO’s “made false and misleading claims to investors” and “lacked sufficient assets to repay its obligations”. The report cited Alex Mashinsky’s tweets (CEO of Celsius) and blog posts stating the company was “profitable or financially healthy” at a time when it was actually experiencing “catastrophic losses” and “failed to earn sufficient revenue to support returns.” The report has exposed Celsius’ misleading claims and said the crypto lending platform “artificially inflated it’s CEL holdings” as the Celsius KeyFi saga continues.
In June this year Celsius froze customers’ withdrawals due to “extreme market conditions” igniting growing concern the lender was in trouble. The following month KeyFi, a former asset manager and partner of the platform, sued Celsius on the grounds of mismanagement of customer deposits, fraud and not paying for KeyFi’s work. Now in a turn of events Celsius has countersued KeyFi alleging incompetence and deceit..
But while the big bosses dispute, what about the thousands of customers who trusted the platform? Will there be compensation and is this another call for harsher regulations on crypto platforms?
Founded by Alex Mashinsky and Daniel Leon, Celsius network is a platform which holds customers’ money but also lends it; pitching the platform as a new place to put your money and borrow money. But continuously stressing it is not a bank but rather as stated by its tagline a “new economy where financial freedom doesn’t come with a price tag”.
Its popularity snowballed as Celsius promised high interest, more than 10% in some cases, on customers’ money, this promise and personable marketing from CEO Mashinksy, through the means of live streaming, led to Celsius taking in $25billion AUM. In short, the rates that Celsius was paying were considerably higher than a normal bank pays on saving accounts making it an attractive option for users.
Bloomberg reported some customers trusted the platform so much they put their entire savings into it. Celsius stated its yields were as high as 17% and promised high returns for investors. Calling his users “Celsians” Mashinsky explained his platform “takes from the rich and beat the index” for the everyday user. However, former investment manager KeyFi CEO Jason Stone described Celisus as a ponzi scheme in his lawsuit. A claim that has been backed by Reddit users who argue that the platform was set up as one or at least has ended up as one.
There was a period of success for Celsius with many customers seeing huge rewards from 2017 to 2021. In addition, the platform received large investments in 2020; a staggering $750 million was invested into the company. Celsius stated that high-interest payments were possible because Celsius invested the deposits and earns bigger returns, feasible by lending to big cryptocurrency traders.
In May this year Celsius website stated the lender was managing $11.8 billion in assets, with another $8 billion in client loans. It even created its own crypto token that people could invest in called CEL, meaning Celsius could create liquidity where they needed it. Celsius offered its higher interest rates only to customers who agreed to receive the interest payment in CEL tokens, which the company had considerable control over. The Financial Times reports the lender bought CEL interest on the open market each week. Then during the Crypto winter the value of CEL plummeted meaning Celsius couldn’t sell CEL to pay back customers and interest.
However, the volatile market of cryptocurrencies means when prices drop the users are at bigger risk due to decentralization. This became evident when users started to withdraw their coins from Celsius, with its high yields and connections to stablecoin Terra, some customers were starting to distrust the lender and withdraw funds in anticipation. As a result, the value of Celsius assets dropped by half from $24billion in December 2021 to $12billion in May. In June, signs the platform was in trouble became more apparent when the platform froze customers’ from withdrawing from their accounts and hired a restructuring lawyer.
As many people anticipated, in July Celcius filed for chapter 11 bankruptcy protection. In its bankruptcy file Celsius stated it owes its users around $4.7 billion in assets. For many, this means the platform is insolvent leading to questions raised about core management, leadership and the CEO.
The factors of seeking high returns and rewards meant the company was not well positioned to ride out the market turbulence, according to former Celsius employees and industry experts. Financial Times revealed Celsius’ internal documents from the compliance department highlighted, “poor oversight, weak internal systems and the possible misrepresentation of financial information”. The crypto market is turbulent, high risk and constantly changing. This means that when a company over promises, in Celsius’ case high interest returns. That when the crypto climate changes it is not always as simple as selling more Cel, which fell from a peak of $8 to as of writing just over a $1.
To add even more to the saga earlier this summer Celsius’ partner KeyFi is suing Celsius on the grounds of mismanagement and failure to pay the company. A couple of months later Celsius has now countersued KeyFi and its CEO Jason Stone on grounds of using the platform’s fund for unauthorized business dealings, outright theft and “gross negligence”. Celsius has accused KeyFi of using Celsius assets to acquire NFTs which was forbidden by the crypto lender.
The lending platform claims these NFTS bought using Celsius (customers) coins were then sold and the profit laundered through Tornado. Tordano was recently blacklisted by the US Department of the Treasury for its use in money laundering, by Stone. In the countersue Celsius stated KeyFi should pay punitive damages for its criminal misconduct. Neither cases have been resolved and the verdicts are yet to come out, but many have noted that this countersue may be a lucrative way for Celsius to pay off their debts.
Daniel Leon, who was vocal on twitter about the highs of Celsius, has been revealed to have sold his CEL back to the company. Financial Times reports on one day Leon sold $1.8mn of CEL back to the company and from October 2020 to August 2021 there were over 16 disposals from Leon making a total of $11.5mn. In addition Mashinsky made $500,000 in a single CEL sale in 2020, there is understanding from ex employees that the CEO also made other sales through other channels. FT reported public Blockchain Arkham estimates Mashinsky sold $44mn worth of CEL through exchanges. KeyFi’s lawsuit against Celsius alleges it artificially inflated CEL and failed to hedge risks.
The Vermont’s Financial Regulation department (VFR) report states: “by increasing its net position in CEL by hundreds of millions of dollars, Celsius increased and propped up the market price of CEL, thereby artificially inflating the company’s CEL holdings on its balance sheet and financial statements.
“Excluding the company’s net position in CEL, liabilities would have exceeded its assets since at least Feb. 28, 2019. These practices may also have enriched Celsius insiders at the expense of retail investors,”
The report has exposed again the need for harsher regulations on crypto lenders. Kenneth Rogoff Professor of economics and policy at Harvard University wrote in an article for The Guardian crypto currency problems will eventually affect a countries economic then governments “will be forced to institute a broad-based ban on digital currencies that do not permit users’ identities to be easily traced (unless, that is, technological advances ultimately strip away all vestiges of anonymity, in which case cryptocurrencies’ prices will collapse on their own). The ban would certainly have to extend to financial institutions and businesses, and would probably also include some restrictions on individuals. Such a step would sharply undercuts today’s cryptocurrency prices by reducing liquidity”.
The aftermath of Celsius’ and its CEOs selling their CELS and manipulating the market affects the ordinary person. Ordinary people like you and me who have invested into decentralised banking but also the false promises of overzealous businessmen.
Author: Bronwen Latham
#Celsius #KeyFi #Crypto #DeFi
