- The company promised a community-directed lending system that would come with huge returns and financial freedom
- Crypto lender has had serious problems since at least 2020
Celsius misled its users and sometimes used funds belonging to new customers to pay for older customers’ withdrawals, the classic definition of a Ponzi scheme according to Shoba Pillay, an independent examiner.
She was asked by the New York bankruptcy court to provide an objective view of the crypto lender’s operations. Her findings on operations in the period before Celsius declared bankruptcy in July last year were published in a report.
Promises vs. reality
The company promised a community-directed lending system that would come with huge returns and financial freedom. In fact, Celsius itself was largely building the market in CEL, its native token, and concealed the risks from its customers. Pillay said:
If Celsius hadn’t suspended customer withdrawals on June 12, new customer deposits inevitably would have become the only liquid source of coins for Celsius to fund withdrawals. In some instances, between June 9 and June 12, Celsius did directly use new customer deposits to fund customer withdrawal requests.
This is the classic Ponzi scheme, where actual market performance doesn’t provide promised returns.
The situation was less direct in other cases, for example in May and June 2022. Crypto returns weren’t enough to cover CEL buybacks, so Celsius had to unwind its crypto lending programs.
Problems started years ago
Pillay added that the crypto lender has had serious problems since at least 2020, after it began using customer funds to finance operational costs and rewards.
CEO sold tokens worth $69M before declaring bankruptcy
It emerged that Alex Mashinsky, founder and CEOof Celsius, sold 25 million tokens worth almost $69 million in the four years preceding bankruptcy. He claimed repeatedly that he was not selling CEL, and staff was aware the token had no real value. Celsius cofounders Daniel Leon and Nuke Goldstein are cited as selling CEL worth $9.74 million and $2.8 million respectively.
Pillay also found considerable tax compliance issues in the company. She claims the mining branch could owe over $23 million in use taxes. Its UK VAT liability amounts to $3.7 million.
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