(Kitco News) -
A comprehensive report released Tuesday has confirmed what many in the crypto community long suspected: Bankrupt crypto lender Celsius operated as a de-facto Ponzi scheme and was effectively bankrupt from its inception.
The 476-page report from Shoba Pillay, an independent examiner and former prosecutor appointed by the bankruptcy court, explained in detail how Celsius used the deposits of its customers to engage in “buying sprees” of their CEL token in order to prop up its value and entice new customers, all while timing sales of the token to enrich insiders.
“The business model Celsius advertised and sold to its customers was not the business that Celsius actually operated,” she wrote.
“Celsius boasted that its primary financial product—its “Earn” program— was the “safest place for your crypto.” She wrote that they claimed to know how to generate high returns with low risk by “carefully vetting its financial counterparties” and promised customers “at least 5% annual interest.”
Celsius also built their marketing around the promotion of its native CEL token. “Celsius explained that it intended to raise the initial capital to fund its business by selling 325 million CEL through private pre-sales and an initial coin offering (“ICO”) and that these sales would raise $50 million,” she wrote. “Celsius told customers that they would receive rewards in CEL that Celsius would obtain from its internal treasury (which would hold an additional 325 million CEL) or by buying CEL in the secondary market.”
Celsius claimed this process would create a self-sustaining “flywheel,” where their marketing would generate more users, creating more assets to invest, resulting in more profits, to buy more CEL, boosting the token’s price and the value of customers’ holdings.
“From its inception, however, Celsius and the driving force behind its operations, Mr. Mashinsky, did not deliver on these promises,” Pillay wrote. “Behind the scenes, Celsius conducted its business in a starkly different manner than how it marketed itself to its customers in every key respect.”
According to Pillay, from 2020 onwards, the company spent $558 million buying its own token on the secondary market to drive up the price, without ever disclosing that this was the main reason for the CEL token’s appreciation, rather than genuine broader market interest.
Then, by selling their tokens strategically into this artificially self-inflated market, the founders were able to cash out at a substantial profit. Pillay wrote that between 2018 and Celsius’ bankruptcy in July 2022, founder and majority shareholder Alex Mashinsky made at least $68.7 million through the scheme, with co-founder Daniel Leon making at least $9.7 million.
Celsius filed for bankruptcy on July 14, 2022, listing between $1 billion and $10 billion in assets and more than 100,000 creditors, after pausing all withdrawals from the network and essentially freezing its customers' assets one month earlier citing "extreme market conditions."
"This is the right decision for our community and company," said Alex Mashinsky, co-founder and CEO of Celsius. “I am confident that when we look back at the history of Celsius, we will see this as a defining moment, where acting with resolve and confidence served the community and strengthened the future of the company."
The bankruptcy filing came a day after Vermont's Department of Financial Regulation (DFR) said the crypto lender "is deeply insolvent."
"Celsius deployed customer assets in a variety of risky and illiquid investments, trading, and lending activities," the DFR said. "Celsius compounded these risks by using customer assets as collateral for additional borrowing to pursue leveraged investment strategies … The Department has joined a multistate investigation of Celsius."
On Jan. 4, the judge presiding over the Celsius bankruptcy case ruled that the funds deposited by customers into the company’s ‘Earn’ program are the property of Celsius, per the terms of service. Approximately 600,000 accounts that held assets valued at $4.2 billion – including $23 million worth of stablecoins – were affected by the ruling.
"The Court concludes, based on Celsius’s unambiguous Terms of Use, and subject to any reserved defenses, that when the cryptocurrency assets (including stablecoins, discussed in detail below) were deposited in Earn Accounts, the cryptocurrency assets became Celsius’s property; and the cryptocurrency assets remaining in the Earn Accounts on the Petition Date became property of the Debtors’ bankruptcy estates (the 'Estates')," the judge wrote.
Due to the ruling, most Celsius customers will be considered unsecured creditors, which puts them at the bottom of the list when it comes to recouping funds through the bankruptcy process. Priority will be given to customers who held non-interest-bearing accounts and other secured creditors.
And on Jan. 5, New York Attorney General Letitia James filed a lawsuit against Mashinsky for making numerous “false and misleading statements” which led to investors losing billions.
According to James, Mashinsky misrepresented the platform’s financial condition which directly contributed to investor losses and also failed to register as a salesperson for Celsius and as a securities and commodities dealer.
“As the former CEO of Celsius, Alex Mashinsky promised to lead investors to financial freedom but led them down a path of financial ruin,” said James. “The law is clear that making false and unsubstantiated promises and misleading investors is illegal. Today, we are taking action on behalf of thousands of New Yorkers who were defrauded by Mr. Mashinsky to recoup their losses.”
