Celsius Abused Customer Funds to Buy Crypto

Celsius Network, a now-defunct crypto lender, made big promises to customers. It claimed to be an alternative to traditional banks. More than that, it said it would be better, and it encouraged users to transfer their funds to the company for investment purposes.

However, its big dreams did not pan out, with Celsius declaring bankruptcy and leaving the crypto assets of thousands of users frozen. Worse still, an independent investigation has revealed that Celsius used customer and investor funds to support itself and pay for other users’ withdrawals, similar to a Ponzi scheme.

Independent Investigation

There has been suspicion of misdoing for quite some time. In September of last year, Judge Martin Glenn of the New York Southern District bankruptcy court appointed Shoba Pillay, a partner at the international law firm Jenner & Block and a former U.S. prosecutor, to investigate Celsius.

The goal of the investigation was to see how the company managed its customer funds and its own crypto holdings. Ultimately, Pillay was tasked with determining if the lender’s activities were similar to a Ponzi scheme.

Investigation Report

Tuesday, the independent examiner released a 689-page report, claiming that the now-bankrupt crypto lender Celsius Network was misusing both customer and investor funds to sustain its own base and pay for other user withdrawals, operating similarly to a Ponzi scheme.

The report went on to reveal that the company’s co-founders, Alex Mashinsky, Daniel Leon, and Nuke Goldstein, made significant profits by selling millions of dollars worth of their native token CEL in the years leading up to the company’s bankruptcy. Reportedly:

• Mashinsky sold at least $68.7 million
• Leon sold $9.7 million
• Goldstein sold $2.8 million

The report also mentioned that Mashinsky and other executives misled or outright lied to Celsius customers about the amount of CEL tokens bought and sold. Moreover, in 2020, the company purchased a large amount of CEL tokens “for the purpose of increasing CEL’s price.”

Moreover, Celsius employees did all of this despite knowing that its native token had what Pillay called  “limited utility.” There was no market outside of the company’s platform to deploy CEL, but that did not stop the buying and spending at all.

Ponzi Scheme

It all started because Celsius did not make enough on its crypto deployments, and instead of finding a solution or admitting to it, the company began to use customer funds to buy back CEL.

However, there was more to it than that. Its 2021 shortfalls were also caused by an ineffective tracking system, which it covered by using customer funds to buy stablecoins.

Additionally, the company owed customers $1.36 million in payments from 2018 to 2022, but it did not make that much from customer deposits. That put it in a bad position that led its Coin Deployment Specialist Dean Tappen to say that his title should be changed to “Ponzi consultant.” While he tried to walk back the comment made in 2021, it seems fitting given what was going on inside the company.

Justification

All of the companies that find themselves in these situations seem to have a justification for it. In Celsius’ case, Pillay wrote that the company believed filling its balance sheet using customer funds was fine because “it was not selling customer deposits but instead posting them as collateral to borrow the necessary coins.”

But Celsius is not alone in thinking that customer funds are up for grabs. FTX is a great example of what happens when a company and CEO are willing to do as they please with customer funds.

What Comes Next?

Some customers have been told they can begin withdrawing their funds from Celsius, but it does not change the fact that thousands of people were defrauded out of billions worth of cryptocurrency. How much of that users will get back is unknown, but it is unlikely to be anywhere near what they put it.