The New York Attorney General’s Office sued Celsius’ Alex Mashinsky on January 5, alleging that the former CEO and co-founder participated in a scheme to defraud “hundreds of thousands” of investors by using false and misleading representations to induce them to deposit with the firm. The NYAG’s office is seeking damages, disgorgement, and restitution, as well as orders preventing Mashinsky from doing business in the state of New York.
Among Mashinsky’s many sins, chief among them is the “hundreds of interviews, blog posts, and live streams” in which Mashinsky promised prospective investors high yields with minimal risk while assuring them that their digital assets would be “as safe as money in a bank.”
The NYAG complaint alleges that these improbable promises helped Celsius amass $20 billion in digital assets from investors worldwide. As Celsius grew larger, however, it struggled to generate the revenue required to make good on its yield promises, which in turn led to the company taking on riskier and riskier bets. Despite these struggles, the complaint says Mashinsky continued to promise high yields and a safer investment than those offered by “the banks.”
Even as the 2022 digital currency crash began to accelerate and Celsius’ liabilities exceeded its assets by hundreds of millions of dollars, Mashinsky kept promising the world while insisting that customer assets were safe with Celsius. They were not: Celsius froze customer withdrawals in June and filed for bankruptcy in July, leaving many customers “in a state of desperation and financial ruin.”
The effect of Mashinsky’s continued empty promises were revealed to the NYAG in devastating detail via letters sent to them by those unlucky enough to have been duped by them. The NYAG’s complaint describes a father of three who lost his life savings of more than $375,000, a disabled veteran who lost a decades-long nest egg worth $36,000, and another disabled customer whose losses left him feeling “humiliated and defeated.”
For Celsius’ investors, the damage has already been done
This sort of language has been a cornerstone of the digital asset industry, and it has taken a sustained crash and run of high-profile collapses to reveal that the kind of promises made by Mashinsky is mere puffs of smoke: it turns out that improbably high yields are not sustainable, and that entrusting your assets to shady outlets like Celsius is nothing at all like depositing into a regulated bank. It’s more akin to giving your life savings to an unfamiliar cousin who promises to return in a month with double what you put in: he’s never coming back, and neither is your money.
More than anything, however, the action against Mashinsky and Celsius’ ongoing bankruptcy reveals the sad truth that the damage has largely already been done. This latest action is juxtaposed perfectly with a judgment from the bankruptcy court in charge of Celsius’ wind down from earlier this week. There, it was ordered that the $4.2 billion worth of customers’ digital assets deposited into Celsius’ Earn program before bankruptcy belongs to Celsius in accordance with the platform’s terms of service. It authorized the sale of $18 million worth of those assets in order to fund the company’s bankruptcy.
For those who listened to Mashinsky’s bluster rather than read the terms and conditions they were signing up for, this will seem like a draconian approach to their life savings. However, the bankruptcy judge acknowledged the complaints concerning Mashinsky’s representations but said that none had been formally submitted into evidence, and he could not conclude that they had modified the terms of service.
The net result is that anyone unfortunate enough to have deposited assets into Celsius’ Earn program now has to get in line as unsecured creditors and hope there’s enough money left by the time their ticket is called to recover some sliver of their savings.
Cracking down on fraudulent advertising
The action by Letitia James and the NYAG office provides an alternate glimmer of hope, if not that those affected by Mashinsky’s lies can be made whole, then some justice will be meted out eventually. Indeed, as the scale of malfeasance within the industry continues to be exposed, more attention is being paid to rampant false advertising and its part in inflating the ‘crypto’ balloon and its subsequent popping.
On December 5, Bloomberg reported that the U.S. Federal Trade Commission (FTC) was investigating several unnamed digital asset firms over deceptive advertising practices. In October, influencer Kim Kardashian was fined $1.2 million by the SEC for failing to disclose that she had been paid to endorse ETHMax.
It isn’t just regulators and law enforcement taking action against such deception, either. In the aftermath of the FTX disaster, several class action suits were filed against FTX and its many celebrity endorsers, all alleging in one way or another that the defendants had made misrepresentations and omissions in regard to the FTX offering. However, the bar for this kind of liability remains improbably high. Fortunately, legislative intervention is being considered in the U.K., where the proposed Financial Service and Marketing Bill would prohibit any advertisement for digital asset products without first obtaining a license from the Financial Conduct Authority.
Elsewhere, a colossal passing-off action was launched against Coinbase (NASDAQ: COIN) and Kraken in the U.K. for leveraging the excitement around Satoshi Nakamoto’s Bitcoin to sell unrelated products to unwitting investors. The claim, brought by Bitcoin inventor Dr. Craig Wright, is said to be worth hundreds of billions of pounds. Though the action is an essential tool for protecting intellectual property, Dr. Wright made clear in a statement that it was brought in an effort to protect the consumer from fraud and deception.
Really: Not your keys, not your coins
Regardless of the outcome of the bankruptcy proceedings and the NYAG action against Mashinsky, the Celsius saga has once again exposed the folly of entrusting your assets to any platform that doesn’t put customer custody of assets at the core of its value proposition. These alternatives do exist: Rock Wallet is a self-custodial, multi-asset mobile wallet that leaves the ownership of your assets entirely to you, the depositor. As more platforms fail in the wake of the last 12 months of market turmoil, investors will begin to recognize this folly and accept no substitute.
Disasters like the FTX and Celsius collapses show that as long as there is any scope for people like Sam Bankman-Fried and Alex Mashinsky to gamble away their assets on risky bets at self-enrichment, they will take it—even where the stability of the entire industry is at risk.
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