Week In Crypto: Celsius Reveals Its Missing Billions, Coinbase Hit By New Insider Trading Claims

August 19, 2022
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New court hearings shine a light on the hole in Celsius’s balance sheet, fresh allegations of insider trading are levelled against Coinbase and another algorithmic stablecoin unravels.

New court hearings shine a light on the hole in Celsius’s balance sheet, fresh allegations of insider trading are levelled against Coinbase and another algorithmic stablecoin unravels.

Celsius, the collapsed crypto lending platform that is undergoing bankruptcy proceedings, has revealed in new court filings the extent of its missing bitcoin losses.

In a statement submitted to court on August 14, Celsius confirmed that at the end of July the company had only 38,000 bitcoin in its possession (currently worth about $900m).

The figure is a far cry from the 100,000 bitcoin (worth about $2.35bn in today’s prices) that customers had deposited to Celsius and not withdrawn before the company filed for bankruptcy.

On top of losing almost a third of customers’ bitcoin deposits, Celsius also declared that it expects to burn through $46m per month in negative cash flow over the next three months.

Without additional revenue, Celsius’ total liquidity would fall from $66m this month to negative $34m by the end of October.

Judge throws Celsius a mining lifeline

This week, during hearings in federal court in New York, Celsius therefore called on Judge Glenn Martin to allow it to raise cash by selling newly mined bitcoin on the open market.

The proposal was met with opposition from Celsius’ customers — most of whom are now deemed general unsecured creditors — who want to see their deposits returned as quickly as possible.

The proposal was also unpopular with Shara Cornell, a bankruptcy trustee representing the US Department of Justice (DOJ), who argued that Celsius has not provided enough clarity about the nature of its bitcoin mining operation for approval to be granted.

In the end, a compromise was reached when Celsius agreed to keep the proceeds of its newly mined bitcoin sales separate from the rest of the company’s cash management system. Cornell still objected, but the judge granted the approval nonetheless.

In earlier court filings submitted in July, Celsius touted the health of its mining arm, Celsius Mining LLC, and even said it had planned for the mining company to go public before the company filed for bankruptcy.

Celsius’ mining operation is currently generating approximately 14.2 bitcoin ($330,000) per day, and aims to generate 10,118 ($238m) this year, as per the filing in July.

Canadian pension fund giant writes off Celsius exposure

More revelations involving Celsius continued to surface throughout the week.

On Tuesday (August 16), an exclusive story by the Financial Times quoted anonymous sources who claimed that Celsius CEO Alex Mashinsky had personally taken over the firm’s trading strategy in January this year.

Mashinky’s decisions led to trading losses of $50m in January alone, the source said, followed by larger losses through Q1 and Q2.

They also said that Mashinsky had personally overruled the better judgments of Frank van Etten, chief investment officer at Celsius, who left the company in February.

On Wednesday (August 17), Canadian pension fund giant Caisse de Depot et Placement du Quebec (CDPQ) revealed that it has written off its $150m investment in Celsius.

The loss will be little more than a scratch for CDPQ, which manages about $304bn of pension plans and insurance programmes. However, it does highlight the naivety of some in the traditional finance world with regard to crypto.

Charles Emond, chief executive of CDPQ, explained the investment as a case of too much too soon, noting that CDPQ had perhaps “underestimated the challenges” of investing in the crypto industry.

“For us it’s clear when we look at all of this, even if the last chapter has not been written, that we went in too soon into a sector that was in transition, with a business that had to manage extremely quick growth,” he said.

Coinbase hit by new insider trading claims

In another run of bad press for Coinbase, the exchange is facing a new set of allegations of insider trading.

In an academic study published this week, researchers from the University of Technology Sydney claim that insider trading at Coinbase is even more widespread than US regulators have so far alleged.

As in the ongoing case of Ishan Wali, a former Coinbase product manager accused of insider trading, the study focuses on new token listings and their potential to be gamed by Coinbase employees.

Based on an analysis of blockchain data, specific transactions and wallet addresses, the researchers estimate that insider trading took place in 10 to 25 percent of new token listings on Coinbase.

They further estimate that at least $1.5m in trading profits was generated through insider trading on Coinbase from September 2018 to May 2022, and the researchers claim they have identified cases that are yet to be prosecuted.

“We find evidence of systematic insider trading in cryptocurrency markets, where individuals use private information to buy coins prior to exchange listing announcements,” the researchers note

“Our analysis shows significant price run-ups before official listing announcements, similar to prosecuted cases of insider trading in stock markets.”

Acala burns $1.2bn aUSD following stablecoin exploit

The prize for this week’s biggest exploit in crypto goes to Acala, a decentralised finance (DeFi) network that runs on the Polkadot blockchain.

Among its use cases, Acala allows users to mint aUSD, the network’s native stablecoin, by depositing the right amount of collateral to a smart contract.

Last weekend, however, a “misconfiguration” in an aUSD liquidity pool allowed a hacker to erroneously mint $1.2bn worth of aUSD stablecoin without any collateral.

Once the tokens were minted without collateral, aUSD rapidly began to lose its peg to the dollar.

From top to bottom, aUSD lost 99 percent of its value, with each token at one point trading for one cent.

In response, Acala proposed a vote and obtained community approval to freeze the network and destroy the erroneously minted tokens, allowing aUSD to return to its dollar peg.

Some crypto observers complained that if a majority of users can simply vote for the destruction of another’s tokens, then decentralised platforms such as Acala are not safe to use.

However, others such as Justin Trollip, CEO of Pangolindex, a decentralised crypto exchange, said the move demonstrated that defi users can be protected from bad actors.

“I want a legitimate financial system that is fair to its users,” he said. “The ability of Acala and Polkadot to roll back this minting bug means that in theory their users are protected.

“We are building bleeding edge technology and mistakes happen. Users shouldn’t be punished for being early adopters, and I’ve been mightily impressed by Acala’s response.”

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