The Court appointed examiner investigating Celsius Network, the bankrupt US crypto lender, has accused the company of misleading investors, misappropriating client assets and using new customers' assets to pay for other customers’ withdrawals, the typical definition of a Ponzi scheme.
In her final report filed on Monday, Shoba Pillay, wrote that:
In every key respect – from how Celsius described its contract with its customers to the risks it took with their crypto assets – how Celsius ran its business differed significantly from what Celsius told its customers.
Celsius promised customers high returns and financial freedom, through a community-led lending system. The examiner found that the business was conducted in a starkly different manner than it was marketed and that Celsius' management were aware of these inconsistencies.
The report cites misleading representations with respect to the company's earn product and market making activities in relation to its native CEL token which would have enabled Celsius to inflate its balance sheet. By the time of its bankruptcy, Celsius could no longer afford to prop up the value of the CEL token. In the meantime, senior management reportedly netted millions by selling their CEL token holdings.
The examiner found that Celsius started using customer deposits to pay for operational expenses and rewards as early as 2020. Further, from May 2022, Celsius began using customer deposits as collateral for borrowings which enabled it to meet customer withdrawals. It is alleged that management justified this decision on the basis that customer deposits were not directly being used to pay customer withdrawals.
On 12 June, Celsius stopped customer withdrawals and according to Pillay, if this measure was not taken:
New customer deposits inevitably would have become the only liquid source of coins for Celsius to fund withdrawals…In some instances, however, between June 9 and June 12, Celsius did directly use new customer deposits to fund customer withdrawal requests.
The report amounts to an indictment of Celsius' operations and business practices. It follows news last month that the company's founder, Alex Mashinsky, has been charged with defrauding investors of billions by making misleading statements in the lead up to its bankruptcy. The civil suits seeks banning orders against Mashinsky and damages.
The examiner's findings underscore the need for enhanced regulation of centralized cryptocurrency platforms to reduce the risk that practices like those which Celsius allegedly engaged will be repeated. As 2023 begins, we continue to see strong legislative momentum globally as regulators move to address bad practices exposed by this crypto winter. It remains to be seen if Australia can keep up with the legislative race.