Celsius backed its own crypto token with customer funds

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A court-appointed investigator says former Celsius CEO Alex Mashinsky sold more than $68 million worth of the network’s native CEL tokens since 2018, as the network used customer funds to prop up the price CELs. Photo: Kevin McGovern (Shutterstock)

Before it finally imploded, crypto lender Celsius Network promised users that it wouldn’t be a regular bank number, it would be bigger than a bank, and users could debank themselves by channeling some of their funds to Celsius. Users would earn interest while Celsius would carefully manage your crypto for you, investing it to generate income. Of course, it didn’t work out that way for the thousands of people whose crypto was locked by the company when it declared bankruptcy. Now, a new report from an independent investigator investigating the exchange has said Celsius is using customer and investor funds to support its own base and pay for other users’ withdrawals, much like a scheme. of Ponzi.

In a massive 689-page report filed on Tuesday, an independent examiner said the bankrupt network was taking both investor money and customer funds and using both to support the price of its native CEL token. At that time, co-founders Alex Mashinsky, Daniel Leon, and Nuke Goldstein each sold millions of dollars of this token over the past few years, until the company filed for bankruptcy. Mashinsky made at least $68.7 million in sales, more than previously alleged. Leon sold at least $9.7 million from CEL while Goldstein sold $2.8 million, according to the report.

Last September, Judge Martin Glenn of the Southern District of New York Bankruptcy Court appointed Shoba Pillay, a former U.S. attorney and partner at international law firm Jenner & Block, to account for the lender’s handling of the funds. customers and his own crypto holdings. He was also asked to identify if any of Celsius’ activities were close to a Ponzi scheme.

The document also describes the number of times Mashinsky and other executives deceived and lied to Celsius customers about how much CEL the company bought and sold, often fearing the community would be upset. In 2020, the company purchased a ton of CEL tokens in an attempt to boost the price of CELs, according to the document.

And of course, the native Celsius token had limited utility, according to Pillay, because there was no market to deploy CEL outside of the company’s platform. The employees knew this, but the company continued to buy and spend anyway.

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Gizmodo reached out to the company for comment, but we didn’t immediately hear back.

Pillay wrote that Celsius effectively acted as a Ponzi scheme, borrowing from an unwitting Peter to put the crypto in Paul’s pockets. Pillay wrote that since he wasn’t earning enough from his crypto deployments, he started using funds deposited by customers to buy out CEL. This, coupled with an ineffective tracking system, led to shortfalls in 2021. The company again used customer funds to purchase stablecoins to fill the hole. Over four years, from 2018 to June 2022, the company was forced to pay $1.36 million to customers, though that was more than it generated from customer deposits. Pillay quoted Celsius Coin deployment specialist Dean Tappen as saying that in 2021 his title should be changed to consulting Ponzi, although he later tried to walk back his comment. Tappen also called Celsius’ misuse of client funds very much like a Ponzi in April last year.

Celsius acknowledged that it should not use customer assets to buy coins needed to cover debts to other customers, Pillay wrote. But he justified his use of customer deposits to fill this hole in his balance sheet on the basis that he was not selling customer deposits but rather depositing them as collateral to borrow needed coins.

FTX’s downfall was categorized by how the crypto exchange and its CEO Sam Bankman-Fried were so willing to use customer funds to support its efforts. That included backing from hedge fund Alameda Research, as well as allowing FTX executives to lead lavish lives, according to documents and the people who have run the company since it declared bankruptcy in November last year. .

The apple, or perhaps the crypto token, does not fall too far from the Merkle tree. Celsius is still under investigation by the vast majority of US states, and New York Attorney General Letitia James has sued Mashinsky over allegations of fraud.

Although even with these ongoing investigations, it is still unclear whether Celsius customers will ever see their lost funds again. The bankruptcy court previously ruled that all Celsius customer assets belonged to the company thanks to the lenders’ terms and conditions.

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