Week In Crypto: Celsius Declared ‘Insolvent Since Inception’

February 3, 2023
A final report into the Celsius bankruptcy finds that the collapsed crypto lender was never solvent, and a judge rules that the public should know who bailed Sam Bankman-Fried out of jail. Meanwhile, a Korean crypto executive is arrested on fraud and embezzlement charges.

A final report into the Celsius bankruptcy finds that the collapsed crypto lender was never solvent, and a judge rules that the public should know who bailed Sam Bankman-Fried out of jail. Meanwhile, a Korean crypto executive is arrested on fraud and embezzlement charges.

An examiner in the Celsius bankruptcy case has submitted a damning final report on the collapse of the company that was once the world’s largest crypto lending platform.

In her 689-page report, examiner Shoba Pillay wrote that Celsius had been “insolvent since inception”, and that insiders at Celsius were aware that its business model amounted to a “Ponzi-like” operation.

Pillay’s report is based on Celsius’ financial and public statements, witness interviews and internal communications that have come to light during bankruptcy proceedings.

In line with allegations made by other regulators, Pillay concluded that Celsius’ official business model was never viable and that the company had to rely on manipulating the price of CEL, its own token, to stay solvent and pay out interest to customers.

“The business model Celsius advertised and sold to its customers was not the business that Celsius actually operated,” wrote Pillay.

“By investing with Celsius, customers were told that they would be able to ‘unbank’ themselves and enjoy ‘financial freedom’ as part of the Celsius community.

“Behind the scenes, Celsius conducted its business in a starkly different manner than how it marketed itself to its customers in every key respect.”

By using customer funds to purchase massive amounts of the CEL token, Celsius was able to inflate the value of the CEL in the company treasury from $9.6m in 2019 to $1.5bn at the end of 2021.

Celsius also used customers’ bitcoin and ethereum deposits as collateral to borrow stablecoins from other crypto exchanges, lenders and decentralised finance (defi) platforms — once again, to fund operations and pay out interest.

However, as customers removed their funds from the platform in 2022, Celsius could no longer afford to prop up CEL’s price, and its balance sheet began to collapse.

As part of the bankruptcy proceedings, Pillay, a former federal prosecutor, was given access to all company communications, including emails.

In these communications, Celsius insiders appear to be aware that their commingling of customer funds was potentially unethical, if not illegal.

In April 2022, for example, Celsius’ then Coin Deployment Specialist Jake Tappen described the practice of using customer funds to buy more CEL tokens as “very Ponzi like”.

And in an earlier communication, in January 2021, Tappen joked that his title at Celsius should really be “Ponzi Consultant”.

In 2022, as bankruptcy neared, Celsius employees routinely stated in internal communications that CEL was a “worthless” asset whose price “should be 0”.

They also questioned why anyone, other than Celsius itself, would choose to purchase CEL.

As early as September 2020, Celsius employees remarked that they had used customer funds to purchase more CEL than what was necessary to pay out rewards to customers.

While keeping the difference for themselves, Celsius executives joked that their “good work” had resulted in “people thinking the price of CEL is going to the moon”.

Elsewhere in her report, Pillay unearthed other misrepresentations from founder and former CEO Alex Mashinsky, who used to broadcast a weekly "Ask Mashinky Anything" livestream.

Contrary to Celsius’ own Terms of Use, Mashinsky repeatedly told customers during these livestreams that crypto-assets deposited to the platform are “your coins, not our coins”.

And when asked what would happen if Celsius went bankrupt, Mashinsky said that “coins are returned to their owners, even in the case of bankruptcy.”

As previously reported in Week In Crypto, the bankruptcy judge presiding over the case has ruled that customers of Celsius’ Earn programme are unsecured creditors to Celsius.

Bankman-Fried’s mystery jail-breakers

Staying in New York, a district court judge has ruled that the names of two individuals that paid former FTX CEO Sam Bankman-Fried's bail should be unsealed in future court hearings.

Judge Lewis Kaplan made the decision after being petitioned by several news organisations, including FT, CNBC, Bloomberg and Reuters. Pending a counter-appeal, the names could be unsealed as soon as February 7.

In the petition, filed last month, the news outlets argued that it is in the public interest for the names of all individuals who contributed to Bankman-Fried’s $250m bail to be revealed.

“Mr. Bankman-Fried stands accused of perpetrating one of the largest financial frauds in history, misappropriating multiple billions of dollars from his investors, and using customer funds to purchase personal properties, backstop trades at his hedge fund Alameda Research, and fund extensive political donations,” the petition states.

“The public has an interest in knowing who it is that provided Mr. Bankman-Fried with financial backing following this alleged massive fraud and political scandal, particularly given Mr. Bankman-Fried’s close relationships with leaders of the financial industry, investors, prominent Silicon Valley billionaires, and elected representatives.”

In prior hearings, as reported by VIXIO, Judge Kaplan had granted Bankman-Fried’s request to have the names of two of his four bond signees sealed on privacy and personal safety grounds.

This meant that only Bankman-Fried’s parents, Joseph Bankman and Barbara Fried, were identified as contributors to the bail.

Bankman-Fried remains at his parents’ home in San Francisco, California, where he is currently living.

South Korean exchange founder arrested

South Korean prosecutors have announced the arrest of Kang Jong-hyun, an executive at Bithumb, the country’s largest crypto exchange.

According to a report from CoinDesk Korea, Jong-hyun is suspected of embezzlement, breach of trust and various fraudulent transactions under the Capital Markets Act.

Last year, as reported by VIXIO, Bithumb was at the centre of the Terra-LUNA collapse.

In October, former Bithumb chairman Lee Jung-hoon was asked to speak as a witness at a congressional inquiry into the collapse, but said he was too depressed to attend, after losing $3.6bn during the crash.

At the time, Jung-hoon was also facing eight years in prison for allegedly defrauding a potential Bithumb takeover bidder of $70m, but last month, he was found not guilty, according to local media.

Binance, Mastercard launch prepaid card in Brazil

Ending the week on a somewhat more positive note, Binance has announced the launch of a new prepaid crypto debit card in Brazil in partnership with Mastercard.

The Binance Card will be issued by Dock, a Brazilian fintech, and will allow all verified Binance users in Brazil to make purchases and pay bills using 13 different cryptocurrencies or Brazilian reals.

When paying in crypto, the crypto is converted into fiat in real time at the point of purchase. There is a 0.9 percent conversion charge per transaction when using crypto, but transactions using reals are free.

Brazil is the second market in Latin America to launch a Binance Card, following in the footsteps of Argentina, where the same card launched in August last year.

In Brazil, the card is currently in testing, and will be available within the next few weeks.

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