Celsius crypto lender looked a lot like a Ponzi, says state regulator

For at least two years before its collapse, cryptocurrency lender Celsius Network operated what may look like a Ponzi scheme, the Vermont Department of Financial Regulation alleged in a case in court.

The state securities regulator wrote in support of a motion filed by the US Trustee’s Office that asks the Celsius bankruptcy judge to appoint an independent reviewer.

The Office of the Trustee, a branch of the Justice Department that deals with bankruptcies, wants an independent investigation into what it calls “major transparency issuesaround the case. But Vermont’s latest filing adds big claims to the debacle.

First, Celsius was running with fumes long before the crypto winter. Management ‘kept its massive losses, shortfall in assets and deteriorating financial condition a secret from investors,’ she claims, as Celsius never earned the revenue needed to sustain the returns it had. promised:

This shows a high level of financial mismanagement and also suggests that at least at times the returns of existing investors were likely paid for with the assets of new investors.

Second, Vermont alleges that Celsius was using its native CEL token as a balance sheet ballast:

Credible allegations have been made publicly, through letters to the Court and otherwise, that Celsius and its management have engaged in improper manipulation of the price of the CEL token, including using the proceeds of investor deposits to acquire CEL tokens and increase its net position. in cell

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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 in its balance sheet and financial statements. Excluding the company’s net position in CEL, liabilities would have exceeded its assets since at least February 28, 2019. These practices may also have enriched Celsius insiders, to the detriment of retail investors.

But even with CEL reserves included, reported liabilities still exceeded assets by a yard as the end approached.

Third, Vermont alleges that Celsius and its CEO Alex Mashinsky repeatedly claimed robust health even as they recorded “catastrophic losses.” To drive the point home, the record juxtaposes some rosy tweets with the darker reality.

On May 11, 2022, Mashinsky tweeted:

Despite the extreme market volatility, Celsius has not suffered any significant losses and all funds are safe.

— Alex Mashinsky (@Mashinsky) May 11, 2022

When in reality :

Preliminary internal financial records provided by Celsius to members of the Multi-State Regulators Panel show that Celsius suffered unrealized losses of approximately $454,074,042 between May 2 and May 12, 2022. The company was insolvent and the funds depositors were not safe.

On July 31, 2021, Mashinsky tweeted:

The other guys need to fundraise every few months as they subsidize their already low rates and get all their revenue from fees.

So, Celsius is profitable and always acts in the best interests of its users, while Blockfi has hidden fees and charges you commissions on every move.

— Alex Mashinsky (@Mashinsky) July 31, 2021

But in fact . . .

In fact, a preliminary analysis of financial records provided to the group of multi-state regulators indicates that Celsius suffered massive losses in the first seven months of 2021. It also experienced two significant adverse events in June and July 2021.

Forty state regulators are currently reviewing Celsius’ operations and financial history, the filing also reveals. Too late, unfortunately.

Further reading:

Inside Celsius: How one of the biggest crypto lenders shut down – FT

The FTAV crypto-crypt.