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Celsius Network being pursued by regulators in 5 US states over withdrawal freeze

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Five U.S. state regulators have launched a probe into Celsius Network, one of the largest digital currency lenders in the market. The company recently froze all the withdrawals, and while it claimed that this was to protect investors, Reuters reports that the regulators aren’t as convinced.

Celsius announced that it had paused all withdrawals and asset swaps on its network, causing uproar from investors and leading to a 70% plunge in its native token, CEL. 

“We are taking this action today to put Celsius in a better position to honor, over time, its withdrawal obligations,” the company stated in a blog post, citing extreme market conditions as the key reason for the move. 

Celsius Network founder and CEO Alex Mashinsky broke his long silence a few days later and took to Twitter with a brief message, stating that his team was working non-stop and thanked the ‘Celsians’ for their patience.


But regulators in five states in the U.S. aren’t as convinced by Celsius’ claims of having its customers’ interests at heart. Speaking to Reuters, Joseph Rotunda, the enforcement director at the Texas State Securities Board, revealed that regulators had met early last week to discuss the Celsius saga. He added that they considered the probe into the ‘cryptocurrency bank’ to be a priority.

The outlet reports that the regulators going after Celsius are Kentucky, Texas, Washington, Alabama, and New Jersey, where the company is based.

“I am very concerned that clients – including many retail investors – may need to immediately access their assets yet are unable to withdraw from their accounts. The inability to access their investment may result in significant financial consequences,” Rotunda stated.

Joseph Borg, the Alabama Securities Commission Director, confirmed the probe, saying that his watchdog was working with others to investigate the company. While he acknowledged that Celsius has been complying with and being responsive to questions from regulators, Borg was adamant that the regulators are still quite keen on the probe.

Further, Borg revealed that even the Securities and Exchange Commission (SEC) has been looking into Celsius.

This is not the first time state regulators in the U.S. have gone after Celsius. As CoinGeek reported, New Jersey, Texas, and Alabama all issued cease-and-desist orders against the company in September last year for selling unregistered securities through its lending products. If you want to serve U.S. customers, you must obtain a securities license, the regulators told Celsius.

The making of a $25B house of cards

Many were caught unaware when Celsius announced the withdrawal freeze. Despite its regulatory woes in the U.S. and the U.K., the company had looked healthy and had been paying out some of the highest interest in the financial industry’s history, going up to as high as 18%. In October 2021, the company had claimed that it had $25 billion in assets and 1.7 million users and was growing aggressively.

However, the Celsius debacle has been a long time coming. Initially, the company would collect deposits and lend them to major market makers and hedge funds for arbitrage trading. However, Mashinsky soon shifted to more aggressive tactics, as people with knowledge of the inner workings of Celsius told Financial Times. 

Mashinsky began using a multitude of DeFi protocols, including Terra’s ill-fated Anchor protocol and the Ethereum-based Lido and Curve. Ultimately, this strategy of taking on more risk turned out to be one of the reasons Mashinsky’s house of cards crumbled.

Alex Thorn, the head of research at Galaxy Digital, broke down the dangers of this approach, stating, “On the one hand, there is smart contract risk, there is protocol risk. Also, lending in DeFi exposes you significantly to volatile market moves, whereas lending to a creditworthy institutional borrower is significantly different. [The risk] isn’t the same as relying on crypto market prices to sustain or grow.”

On-chain data reviewed by Nansen, a blockchain analytics firm, revealed that Celsius also lost tens of millions on some of the risky bets it had made. One of these was with Stakehound, an Ethereum staking service that claimed to have misplaced its private keys for over 38,000 ETH. Celsius lost over 35,000 ETH on the deal. Mashinsky conveniently kept this from the investors.

Celsius also mistakenly forfeited restitution payments following the BadgerDAO hack, losing tens of millions of dollars in the process.

Mashinsky, known for his signature “Banks are not your friends” T-shirt, has managed to keep growing the company despite the obvious red flags. Just like with Do Kwon, the founder of the $60 billion LUNA and UST disaster, Mashinsky had mastered the art of expressing confidence even when he’s wrong and tearing at his critics. Moreover, the two always presented themselves as Robin Hood figures who had the interest of the average Joe at heart.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups from BitMEX to BinanceBitcoin.comBlockstreamShapeShiftCoinbaseRipple,
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