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Celsius was a Ponzi scheme, Vermont watchdog says

For several months before its eventual collapse, Celsius Network was deeply insolvent and masked its losses behind a Ponzi scheme-like business model, the Vermont securities watchdog has alleged.

In its filing with the New York Bankruptcy Court, the Vermont Department of Financial Regulation wrote in support of a request by the Trustee Office to appoint an independent examiner in its probe into Celsius, the collapsed lender that filed for bankruptcy in mid-July. As CoinGeek reported last month, trustee William Harrington requested that the examiner looks into “credible allegations of incompetence and gross mismanagement” at Celsius.

In its filing, Vermont noted that at least 40 state regulators in the United States are going after the lender for securities fraud, market manipulation, mismanagement, and more.

“At a minimum, Celsius has been operating its business in violation of state securities laws. That improper practice alone warrants investigation by a neutral party.”

However, it goes beyond regulatory actions. The Vermont watchdog believes that Alex Mashinsky, the Chief Executive Officer who is believed to have played the biggest role in the lender’s collapse, lied to investors regularly about their funds and the company’s financial health. In essence, he was running a Ponzi scheme for two years before Celsius imploded, the agency boldly claims.

“Celsius also admitted at the 341 meetings that the company had never earned enough revenue to support the yields being paid to investors. This shows a high level of financial mismanagement and also suggests that at least at some points in time, yields to existing investors were probably being paid with the assets of new investors,” the agency said in its filing, coming just short of calling it an outright Ponzi scheme.

The regulator pointed to several instances in which Mashinsky and the company claimed to either be making money or having evaded industry-wide catastrophes like the Terra/LUNA collapse. However, as was later proved, the company was deeply impacted by these events. In one instance, Mashinsky tweeted on May 11 this year that the lender had not incurred any losses.

However, in actual fact, “preliminary internal financial records provided by Celsius to members of the multistate regulator group show that Celsius experienced unrealized losses of approximately $454,074,042 between May 2 and May 12, 2022.”

Aside from concealing the losses, Mashinsky also lied about the company’s compliance. In December last year, for instance, he told Kitco News, “[S]tates and other regulators have looked into Celsius. They came back: ‘thumbs up, there’s no problem. We did not find anything…’ And we just raised $750 million round. So, our investors, they dug all the way in [and] made sure everything is kosher—no problems.”

However, at the time, the company was facing probes and pressure from several state regulators in the United States.

The Vermont watchdog also pointed to Mashinsky’s use of native CEL tokens to balance the books as additional proof of fraud. As many (including former employees) have revealed, the company used client funds to purchase CEL tokens, giving the impression of high market demand and driving the token price higher. This allegedly allowed Mashinsky to balance the books as Celsius is the biggest owner of the CEL tokens. Mashinsky and other top executives were also suspected of making hundreds of millions of dollars from this.

“Excluding the Company’s Net Position in CEL, liabilities would have exceeded its assets since at least February 28, 2019. These practices may also have enriched Celsius insiders, at the expense of retail investors,” Vermont’s securities regulator stated.

The fraud Mashinsky engaged in using CEL tokens isn’t part of the current probe into Celsius. However, it raises the question—should digital asset projects be allowed to issue and use their own tokens as they will? This loophole gives companies an easy band-aid solution to their problems, usually at the expense of retail investors. This particular can of worms could drag in big players like Ripple, which in Q2 alone, sold $408 million worth of XRP, which it pre-mined and can sell at its discretion.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups from BitMEX to BinanceBitcoin.comBlockstreamShapeShiftCoinbaseRipple,
EthereumFTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.

New to Bitcoin? Check out CoinGeek’s Bitcoin for Beginners section, the ultimate resource guide to learn more about Bitcoin—as originally envisioned by Satoshi Nakamoto—and blockchain.

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