Using client cash to purchase its native currency and artificially inflate its price, the now-bankrupt crypto lender Celsius Network was found to be a Ponzi scheme by an independent investigation.
Shoba Pillay, a former prosecutor, has been investigating allegations that the cryptocurrency lender was stealing money and deceiving investors since September. Pillay, a lawyer at the law firm Jenner & Block, was chosen by US bankruptcy judge Martin Glenn to serve as an impartial examiner in Celsius’ chapter 11 bankruptcy case.
The 689-page report’s executive summary claims that Celsius‘ claims of “trust,” “transparency,” and “financial independence” were a total fabrication.
“Behind the scenes, Celsius conducted its business in a starkly different manner than how it marketed itself to its customers in every key respect,” the report concluded.
34 people—including former Celsius CEO and founder Alex Mashinsky, as well as current and former workers, clients, and business associates—were questioned as part of the inquiry.
Due to their significant percentage of tokens increasing in value, Celsius’ inner circle profited millions of dollars. Despite constantly denying his dumping to the public, chief executive and creator Alex Mashinsky is said to have sold at least 25 million CEL tokens during 2018, valued at a minimum of $68.7 million.
During significant sales by early investors, Celsius “frequently boosted the amount of its resting orders to acquire all of the CEL that [they] were selling” in order to maintain the token’s value. Employees were always alert and pressing executives to follow suitable practices.
“We are using users USDC to pay for employees worthless CEL… All because the company is the one inflating the price to get the valuations to be able to sell back to the company,” one employee was quoted as saying in Celsius’ Slack channel.
According to the article, Celsius opted to utilize customer-deposited Bitcoin and Ether to pay for it instead since it couldn’t continue to afford to continue buying back all of its own sales. But the business didn’t record who it was taking money from or how much.
In 2021, as the price of Bitcoin and Ether was skyrocketing, it discovered that it was lacking a large amount of bitcoin and ether that it suddenly needed to purchase in order to keep up with client withdrawals.
It apparently opted to put a band-aid on a leaking ship by using customer deposits to purchase some $300 million in stablecoins to make up for this shortage.
“As a result, Celsius was left with a hole in its balance sheet of stablecoins rather than BTC and ETH,” the independent report stated. “That hole continued to grow as a result of Celsius’ continued buybacks of CEL and the significant losses Celsius suffered on some of its deployments in 2021.”
The investigation revealed how Celsius management made matters worse by refusing to reduce absurdly high incentive rates, employing high-risk investments to boost return, and accepting FTX’s own propped-up token as collateral.
Indeed, Tether and FTX, two other contentious cryptocurrency schemes, were closely associated with Celsius.
According to Pillay’s research, several borrowers, such as Tether, Alameda Research, and Three Arrows Capital, received limitations that were occasionally two or three times higher than usual.
Tether’s exposure reached $2 billion at one point and was classified as an “existential danger” internally.
In order to stay afloat, Celsius was finally forced to halt customer withdrawals in June. In Pillay’s report, it was said that if it hadn’t, “new client deposits certainly would have become the sole liquid supply of coins for Celsius to finance withdrawals.”
Although Celsius occasionally “directly used fresh client deposits to pay customer withdrawal requests,” it often had sufficient reserves left over to cover the remaining unpaid withdrawals.
Additionally, investigators found “severe tax compliance issues” and roughly $14 million in unpaid power bills at Celsius Mining, the company’s mining division.
While $3.7 million has been set aside for a “possible VAT obligation,” an estimated $23.1 million in unpaid usage taxes is still owed.