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

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

The state securities regulator wrote in support of a motion lodged by the US Trustees Office that asks the judge overseeing Celsiuss bankruptcy to supplement an independent examiner.

The Trustee Office, a branch of the Department of Justice in charge of bankruptcies, wants an independent investigation into what it calls significant transparency issues around the case. But Vermonts latest filing adds some big claims to the debacle.

First, that Celsius had been running on fumes long before crypto winter. Management kept its massive losses, asset deficit, and deteriorating financial condition secret from investors, it alleviates, with Celsius never having earned the revenue needed to support the yields it promised:

This shows a high level of financial mismanagement and also suggests that at least at some points in time, yields to existing investors were probably being paid with the assets of new investors.

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

Credible claims have been asserted publicly, through letters to this Court and otherwise, that Celsius and its management engaged in the improper manipulation of the price of the CEL token, including by using the proceeds of investor deposits to acquire CEL tokens and increase its Net Position in CEL

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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 companys CEL holdings on its balance sheet and financial statements. Excluding the Companys Net Position in CEL, liabilities would have exceeded its assets since at least February 28, 2019. These practices may also have enriched Celsius insiders, at the expense of retail investors.

But even with CEL reserves included, reported liabilities were still outstripping assets by a yard as the end drew near.

Third, Vermont alleges that Celsius and its CEO Alex Mashinsky were repeatedly claiming robust health even as they were booking catastrophic losses. To drive the point home, the filing juxtaposes some roseate tweets with the grimmer reality.

On May 11, 2022, Mashinsky tweeted:

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

Alex Mashinsky (@Mashinsky) May 11, 2022

When in actual fact:

Preliminary internal financial records provided by Celsius to members of the multistate regulator group show that Celsius experienced unrealized losses of approximately $454,074,042 between May 2 and May 12, 2022. The company was insolvent and depositor funds were not safe.

On July 31, 2021, Mashinsky tweeted:

The other guys need to raise money every few months because they subsidize their already low rates and make al their income from fees.

So Celsius is profitable and always act in its users best interest while Blockfi has hidden fees and charges you comissions on every move.

Alex Mashinsky (@Mashinsky) July 31, 2021

But actually…

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

Forty state regulators are now looking into Celsius operations and financial history, the filing also reveals. Too late, alas.

Further reading:

Inside Celsius: how one of cryptos biggest lenders ground to a halt FT

FTAVs crypto crypt.

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