Turns out that the Celsius Network, a cryptocurrency lender that promised customers 17% annual returns on their deposits, was indeed too good to be true.
Company recordings and transfers stopped in June 2022 amid a liquidity crisis, citing “extreme market conditions”. The price of bitcoin had halved in two months. In June Celsius filed for bankruptcy and the founder and CEO, Alex Mashinsky, resigned in September.
But according to an inquest into the company, Bitcoin’s falling price was only part of the problem. In fact, Celsius’s failure was inherent in its business model, the researchers found.
“Celsius Network on a standalone basis has been insolvent since its inception,” Shoba Pillay, the former federal prosecutor charged with investigating the company, wrote. in a report (pdf) released January 31.
Mashinsky, who founded Celsius in 2017, has spent years criticizing his company for spreading “FUD” – crypto language meaning “fear, uncertainty and doubt”. But the examiner’s report seems to prove those doubters right.
“Behind the scenes, Celsius conducted its business in a very different way from how it marketed itself to its customers in every important respect,” Pillay wrote.
The report says that while Mashinsky promised customers their deposits were safe with Celsius, he and other executives actually used those deposits to buy and support CEL, the company’s proprietary cryptocurrency, while increasing their individual stakes in the coin for profit. sold. The maneuver benefited Celsius executives while further depleting their company’s liquidity.
Was Celsius a Ponzi Scheme?
Martin Glenn, bankruptcy judge for the Southern District of New York, appointed Pillay in part to investigate claims that Celsius was operating as a Ponzi scheme, a specific type of financial scam where there is no real product and early investors are paid out of deposits from later investors. investors.
While Pillay didn’t explicitly say whether Celsius met the criteria for such a scheme, her findings implied it did.
“However, in some cases, between June 9 and June 12, Celsius used new customer deposits directly to fund customer withdrawal requests,” Pillay wrote.
Employee testimonials in the report also revealed internal concerns that the company was operating a Ponzi scheme.
In one instance, an unnamed employee wrote in April 2022 that the company’s use of customer coins to buy CEL was “very Ponzi-esque.” In January 2021, another named employee wrote that his title should be “Ponzi Consultant,” although he told the examiner that this was just a “bad joke” and he wasn’t concerned at the time that the company was in fact operating a Ponzi scheme.
The report will probably post additional pressure on Mashinsky, who agreed to the examiner’s report in a deal with federal and state detectives investigating him for fraud. In a separate case, the New York Attorney General in January filed a lawsuit against Mashinsky for defrauding investors.
