Celsius tosses scraps to victims, Alex Mashinsky thought himself infallible

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Celsius Network was effectively a Ponzi scheme from its inception, although a select group of small-scale customers may be reunited with a portion of their stranded assets later this month.

This week, Jenner & Block attorney Shoba Pillay, the bankruptcy court-appointed Examiner of the collapsed Celsius crypto lending platform, released a 689-page report into the history of the Celsius fraud. We’ll delve into that report in a second, but first, we should note that a handful of Celsius customers will get the chance to retrieve some of their assets “on or around February 15.” 

In December, U.S. Bankruptcy Court Judge Martin Glenn ordered Celsius to return $44 million worth of digital assets to its former customers. In a new court filing on February 1, Celsius revealed the criteria for which customers will be permitted to withdraw 94% of their assets that have been stranded on the platform since it halted withdrawals last June.

For starters, only assets that were in Celsius’s Custody program or “withhold accounts” are eligible for withdrawal—or assets that were transferred to the Custody program from the Earn or Borrow programs within 90 days prior to July 13, 2022 (the date of Celsius’s bankruptcy filing) but only if the aggregate value of said transfers was less than US$7,575 at the time. There’s also a carveout for digital assets that users transferred to Celsius that “were not supported on the platform and remain in the Debtors’ possession.”

However, qualifying users will be required to pay transaction costs and/or gas fees on a “per withdrawal” basis. Should a user’s balance be smaller than these fees, no withdrawal will be permitted. Eligible users will also be required to update their Celsius accounts to ensure proper know your customer/anti-money laundering information is available.

Celsius is promising to alert eligible users by email and via its app “on or around February 15.” The court will decide at a later date if/when eligible users will see the remaining 6% of their stranded assets.

Doesn’t do what it says on the tin

The Examiner’s report starts with the damning statement that, from the time of its March 2018 launch, “the business model Celsius advertised and sold to its customers was not the business that Celsius actually operated.” Despite promoting its Earn program as the “safest place for your crypto” and the overall company as “built on trust” and “transparency,” Celsius “did not deliver on these promises” and conducted business “in a starkly different manner … in every key respect.”

The rot set in from the day Celsius held its initial coin offering (ICO). The ICO was expected to sell 325 million CEL tokens, with CEO Alex Mashinsky promising to purchase any unsold CEL. In fact, only 203 million CEL were sold, and Celsius not only reneged on its pledge to buy the unsold CEL, but it also neglected to inform the Celsius ‘community’ of this fact.

(The 117 million CEL was later entered into Celsius’s balance sheet on December 31, 2020, at a value of $638,820,000. While Celsius didn’t include these tokens as income on its balance sheet, it did add them to financial analyses provided to potential investors.)

Celsius users were promised rewards from the additional 352 million CEL the company would hold in its treasury or from Celsius buying CEL on secondary markets. The theory was that this would attract more users who would deposit more assets that Celsius could invest, resulting in a self-sustaining ‘flywheel’ that would boost both CEL’s fiat price and customer rewards.

As early as 2020, Celsius began buying up vast quantities of CEL to make it seem that demand was higher than it was and thus ensure a continual rise in CEL’s price. Celsius also began selling CEL in private over-the-counter (OTC) transactions while making offsetting CEL purchases to keep the price high.

For a time, this strategy worked to perfection. Between March 2020 and June 2021, CEL’s price rose by 14,751%. Internally, Celsius staff congratulated themselves on “our good work” in convincing the public that CEL’s price was “going to the moon haha” even as they admitted that the token was effectively “worthless” and its price “should be 0.”

The company came to view the price of CEL as the only thing the public cared about when gauging the health of Celsius, the company. The plan thereafter was to do what it took to “keep the FOMO [fear of missing out] flywheel spinning.”

Robbing Peter, Paul & Mary to pay Tom, Dick & Harry

During this value spike, Celsius insiders were secretly earning millions by selling CEL tokens on the sly. Mashinsky personally realized “at least $68.7 million” from these sales, while co-founder S. Daniel Leon collected “at least $9.74 million.

To protect CEL’s price from the impact of these insider sell-offs, Celsius was buying back the sold tokens, often doing so using customers’ assets. The company’s former chief financial officer noted that “we are doing something possibly illegal and definitely not compliant,” while another staffer said it would be “a very bad look” if the public discovered this ruse.

Celsius began dipping into customers’ BTC and ETH tokens to fund these buybacks. But Celsius’s internal accounting was so poor—like the defunct FTX exchange, Celsius used QuickBooks to handle its financial affairs—that the company had no clear record of how much of these customers’ assets had been ‘borrowed’ in this fashion.

By early 2021, as the price of BTC and ETH soared, and customers sought to cash in their winnings, Celsius was forced to buy these tokens on the open market at a higher valuation with money it didn’t have. To cover this roughly $300 million shortfall, Celsius began spending customers’ USDC stablecoins. But when Celsius’s outside investments soured the same year, this deficit ballooned to around $1 billion.

The level of self-delusion at Celsius was evident in the company justifying its dipping into customer assets by saying that they were posting these assets as collateral to borrow the tokens needed to cover other customers’ liabilities. These assets were also used to continue propping up CEL’s price, leading one exec to internally describe this as “very ponzi like.”

Celsius then began dipping into cash provided by outside equity investors to purchase even more CEL. One Celsius manager later said the company had “spent all our cash paying execs and trying to prop up alexs [sic] net worth in CEL token.”

All told, Celsius spent “at least $558 million” buying “at least 223 million CEL” from secondary markets to its own wallets. That’s 20 million more than the total number of CEL sold in the ICO. In the words of the Examiner: “In effect, Celsius bought every CEL token in the market at least one time and in some instances, twice.”

But with no genuine public appetite for CEL, the company’s vast holdings of the token—representing 95% of all CEL ever minted—could not be drawn upon to pay Celsius’s actual obligations to customers and investors.

Risk vs reward

Meanwhile, Celsius was lying to customers regarding its reward rates. Initially promising to return up to 80% of its revenues to customers, Celsius actually had no reward policy whatsoever until July 2021.

Even that 2021 policy didn’t correspond to the company’s actual revenues, which were so anemic that rewards “exceeded by substantial amounts the revenues Celsius could earn.” Between 2018 and June 2022, Celsius owed customers rewards $1.36 billion higher than the revenue they earned from their deposits.

Celsius offered customers whatever rewards it believed would “beat the competition” and thus encourage more customers to deposit more assets. But the disparity between its rewards obligations and actual revenue led Celsius to make ever riskier gambles in how it chose to invest users’ assets.

In December 2020, around 14% of Celsius’s institutional loans were wholly unsecured. This share rose to roughly one-third by June 2021, while the share of under-collateralized loans was more than one-half.

Celsius saw a rise in fully-collateralized loans by the fall of 2021, but only because Celsius began accepting FTX’s in-house token FTT as ‘collateral.’ By April 25, 2022, FTT and SRM—another token affiliated with FTX founder Sam Bankman-Fried—accounted for more than half of all pledged collateral. As we now know, the value of FTT/SRM was always more or less zero, even before FTX’s late-2022 collapse, meaning Celsius had been ‘swimming naked’ long before its own bankruptcy.

Celsius also booked around $800 million in losses from dodgy investments, including buying the assets of a ‘decentralized finance’ firm (KeyFi) that went sour within a year of its investment. Celsius also suffered an embarrassing gaffe when StakeHound, an ETH-staking platform, lost the keys to some 25,000 ETH in May 2021. Celsius also loaned itself $604 million to launch a ham-fisted BTC mining operation.

The dire state of its finances prompted Celsius to bring in its first-ever risk management team, whose recommendations—including developing an internal audit procedure—were either ignored or delayed. Similar efforts to improve record-keeping were half-hearted at best, leading the company to internally conclude that “our systems are horrible and … can cause us to take on excessive risk.”

That lack of detail cost Celsius dearly when it embarked on some sophisticated arbitrage trading strategies in 2021 and 2022 to boost its yield; Lacking real-time information about its positions, Celsius ended up losing another $150 million it had no way of replacing.

Were you lying then, or are you lying now?

While all this was occurring, Celsius was talking from both sides of its mouth. Its marketing materials told customers that all assets deposited with Celsius remained “your assets,” but its Terms of Use were updated in March 2020 to clarify that deposits meant customers had transferred all “rights of ownership” to Celsius.

Similarly, in his weekly livestream conversations (‘Ask Mashinsky Anything’ or AMA), Mashinsky told customers that their assets would be returned in the extremely unlikely (foreshadowing!) event of a Celsius bankruptcy. Mashinsky was so prone to lying during these events that the videos were often (but not always) edited prior to uploading to YouTube in the hope that viewers wouldn’t notice the discrepancies between what he said and the company’s Terms.

Regardless, Celsisus’s Terms—which Mashinsky told the Examiner he’d never personally read—warned that customers might be unable to “recover or regain ownership” of crypto assets in the wake of a bankruptcy. Last month, a U.S. federal judge agreed that the Terms were “unambiguous,” meaning customer assets were Celsius’s property to do with as they saw fit.

Mashinsky’s lies went way beyond the safety of customers’ assets. During one AMA in November 2021, Mashinsky addressed “rumors” by saying he was “not selling, I’m buying” CEL. It’s technically true that Mashinsky bought 29,000 CEL tokens that month, but he’d sold 344,000 CEL the previous month and sold another 37,000 that December.

Mashinsky also repeatedly told customers that CEL was “registered” with the U.S. Securities and Exchange Commission (SEC) as early as 2018, explaining that this meant Celsius “won’t have the issues [other tokens] have.” In reality, all Celsius had done was file a Form-D informing the SEC that CEL was exempt from registration.

And now, the end is near…

Celsius began to run out of runway early last year, leading some execs to press Mashinsky to stop promising outlandish rewards to customers. Mashinsky refused, saying any reduction in reward rates would cause customers to flock to rivals like BlockFi. He also told his CFO to “tell your team to stay in their lane,” that he was a marketing wizard and he’d soon be able to “bring in a few billion just like I brought in the first $20B.”

But when Terraform Labs’ UST stablecoin began its death spiral in May 2022, Celsius suffered a $1.4 billion outflow in customer assets. Celsius tried once again to prop up the floundering CEL token’s price but ran out of actual cash with which to do so. By the end of May, with only enough liquidity to meet 24% of its obligations, Mashinsky continued to tell customers that “all funds are safe” and Celsius was “stronger than ever.”

Mashinsky then grew desperate, offering existing customers rewards for referring friends, $1,000 bonuses to random new customers and other too-good-to-be-true offers. Just two days before Celsius halted withdrawals, Mashinsky told customers that Celsius had “billions” in liquidity. At that time, the Examiner says Celsius did “directly use new customer deposits to fund customer withdrawal requests.” In other words, a Ponzi scheme.

Math is hard

Celsius’s incompetence wasn’t limited to its lending business. For the first three years of its operation, Celsius had no dedicated tax professionals on its payroll. The BTC mining operation alone owes at least $16.5 million in use taxes and possibly $6.6 million more.

Celsius neglected to apply for tax exemptions in two states—Pennsylvania and Georgia—in which Celsius Mining deployed foreign-bought mining rigs. The most senior tax pro on Celsius’s payroll told the Examiner he had no idea why the company failed to apply for these exemptions.

The gong show continued even after the bankruptcy filing. Celsius Mining deployed some of those foreign-bought rigs in Texas, again without applying for exemptions, leading to the aforementioned $6.6 million in possible use tax liabilities.

This ineptitude was likely assisted by Celsius’s use of QuickBooks accounting software, which is more suited towards basement-run sidelines, not billion-dollar corporations. Worse, Celsius kept 15 separate QuickBooks files that didn’t link to each other, requiring staff to resolve each books’ respective numbers manually.

Celsius also wasn’t above burying embarrassing paperwork. When the Examiner requested all copies of the internal ‘Waterfall Report,’ which offered snapshots of Celsius’s liquidity, Celsius produced only 15 reports. Celsius claimed that it overwrote older versions of the reports as it created new ones. When the Examiner threatened to report Celsius for the routine elimination of financial data, Celsius somehow produced another 1,700 Waterfall Reports, and later found 70 more.

Mashinsky: A legend in his own mind

Besides the Ponzi similarities, one major theme emerges from these hundreds of pages: Mashinsky is an idiot. As the Examiner notes, Mashinsky and those he surrounded himself with “frequently made significant decisions on an ad hoc basis, without any formal procedures, controls or sufficient financial data to inform decisions.”

Mashinsky told the Examiner that he wasn’t concerned about Celsius’s lack of proper accounting because “everything is on the blockchain.” But as the Examiner notes, when Celsius updated its user accounts every week with their rewards, no crypto assets were moved, and nothing was recorded on any blockchain.

Mashinsky simultaneously claimed that he relied on certain internal reports to tell him “where all the coins are,” yet he did “not often” review these same reports and relied on “summaries” provided to him at meetings by other execs.

When Mashinsky went over the heads of Celsius’s Finance & Risk leadership to personally direct asset trades, and those trades went sour, Mashinsky blamed the trading desk. Chief Investment Officer Frank van Etten said Mashinsky had “a tendency to micromanage things in areas where he had no expertise.”

In another shining example, Celsius lost around $160 million after investing in the Grayscale Bitcoin Trust (GBTC) and other funds offered by Grayscale Investments, a Digital Currency Group subsidiary. Celsius began investing in GBTC in July 2020, when the shares traded at a premium to the price of BTC. In December 2020, Celsius boosted its Grayscale investment to $752 million, roughly 30% of Celsius’s deployed assets. The GBTC premium had become a discount in early 2021, yet a Celsius exec claimed Mashinsky wanted to buy more GBTC regardless.

In January 2022, Mashinsky traveled to the Bahamas to meet with Sam Bankman-Fried and other FTX and Alameda Research execs. Mashinsky told the Examiner he “came away distrustful” of SBF and sought ways to unwind Celsius’s exposure to the exchange. But Celsius’s former Chief Credit Officer Brian Strauss said Mashinsky returned from his trip wanting to “double down” on FTX and had to be talked out of lending FTX up to $2 billion.

Tether truthers!

The release of the Examiner’s report appears to have caused Tether’s CTO, Paolo Ardoino, some unwanted indigestion. The report notes that, at one point, “Celsius’s loans to Tether were twice its credit limit,” and Celsius’s Tether exposure eventually grew to over $2 billion—a number so large that in late-September 2021 that exposure was described to the Risk Committee as “present[ing] an ‘existential risk’ to Celsius” because “Celsius’s capital is insufficient to survive a Tether default.”

The ‘to’ in ‘loans to Tether’ possibly should have read ‘from,’ at least, if the rest of the report is any indication. For instance, the report also states that “Celsius had borrowed $1.823 billion of the stablecoin USDT from Tether, posting as collateral $2.612 billion of its assets under management (17% of all assets).” Several other examples suggest Celsius was borrowing from Tether, not the other way around.

Ardoino rushed out a tweet following the report insisting that “Tether never borrowed from Celsius. The doc mixes ‘from’ and ‘to.’ Either is a typo or a mic-characterization.”

Regardless, given Tether’s habitual aversion to anything resembling adequate disclosure regarding its finances, we’re all basically conditioned to think the worst of Tether, so one has to forgive the Examiner for making that oopsie.

Tether did have a 7.73% stake in Celsius, making Tether its third-largest stakeholder, after only Celsius itself and growth equity firm WestCap. At the time of that mid-2020 investment, Mashinsky said Tether’s investment was notable “because obviously they could have worked with anyone.” And yet, they chose the criminally-prone Celsius. Color us shocked—shocked!—that these two firms found a common cause.

Oh, and Paolo… Perhaps you can explain Tether’s repeated denials that its reserves ever contained dodgy Chinese commercial paper, given that the Examiner’s report references an October 24, 2021 email in which Ron Sabo, Celsius’s Head of Research, requests data on “effect of increase in Tether loan to report at next Portfolio Committee meeting”. The title of that email? “Tether’s Chinese CP exposure”.

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