Reports of Celsius Network CFO’s arrest could signal more trouble for Tether

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Celsius Network, the “cryptocurrency bank” valued at US$3 billion, is again under scrutiny this week after rumors spread that its CFO Yaron Shalem had been arrested for fraud in Israel. The company has received funding and loans from Tether, issuer of the ubiquitous but troubled USDT “stablecoin.”

Let’s try this again. Really easy question for Celsius Network CEO @Mashinsky:

Was your CFO Yaron Shalem recently arrested in Israel over fraud allegations relating to the Moshe Hogeg case?

cc @BrianSozzi, @dee_bosa, @ZekeFaux @matt_levine, @jimcramer

— Nate Anderson (@NateHindenburg) November 24, 2021

At the time of writing, Shalem’s arrest has not been confirmed in news reports. However, a number of Twitter accounts posted the claims separately, one saying Celsius was “about to blow.”

El Salvador suddenly announces that due to overwhelming demand for Volcano Bonds, they’ll going to increase the bond size to two billion.

In reality it’s because Celsius is about to blow, with CFO arrested. https://t.co/d4RRcxU9Na

— Bitfinex'ed 🔥🐧 Κασσάνδρα 🏺 (@Bitfinexed) November 24, 2021

Celsius and Tether

Tether has provided a loan to Celsius Network and was the lead investor in a US$30 million funding round in 2020.

Each Tether (USDT) is designed to be worth approximately US$1, and the asset is used as a stand-in for USD on several of the world’s largest exchanges. Its value was purportedly derived from an equivalent “real” U.S. dollar held in Tether’s (the company) reserves—but this was revealed to not be true, and the company also has a history of losing large amounts of money to various misfortunes and seizures.

There are now over 69 billion USDT tokens in circulation. In October 2021, the U.S. Commodity Futures Trading Commission (CFTC) found the company’s actual USD reserves were at times a mere 26% of the USDT total. It hit Tether’s group of companies with $42.5 million in penalties for omissions and misleading statements regarding its USDT-backing reserves, saying the “reserves” included unsecured receivables and other digital assets.

The Moshe Hogeg connection

Shalem was formerly CFO at venture capital firm Singulariteam Ltd., headed by entrepreneur Moshe Hogeg. Hogeg, his firm and his associates have been plagued by accusations and lawsuits alleging involvement in a number of scam ICOs. These include LeadCoin and Stox.

In March 2019, Shalem was removed as a defendant in one of these cases. Chinese investor Zhewen Hu filed the suit in Tel Aviv in January 2019 but dropped Shalem’s name from the list, saying he bore no personal responsibility for the firm’s actions.

Hu later dropped the case after reaching a settlement. However, in December 2019 and again in July 2020, Hogeg and Singulariteam Ltd. were sued by U.S./Canadian investors Sean Snyder and Brad Mills. The suits alleged Hogeg had misappropriated funds raised in ICOs and used them to buy an Israeli soccer team, make a large donation to Tel Aviv University, and fund a real estate deal. They also claimed some of the money was funneled to Singulariteam.

Stox was promoted as a prediction market (and token of the same name) running on the Ethereum network. Hogeg himself has also claimed to be the victim of a crypto scam, saying he was robbed of funds when attempting to buy GRIN coins in a 2019 over-the-counter (OTC) transaction.

About Celsius Network

Celsius has been referred to as a “sort-of cryptocurrency bank” holding 40% of its deposits in BTC and 30% in ETH. What makes it bank-like is that its deposits can be loaned out, earning their original holders 5-12% yearly interest.

That large interest rate has led to allegations that Celsius is operating a kind of Ponzi scheme, something its executive team has denied. It makes enough money to pay the interest through mining BTC and trading other assets using hedging strategies, they claimed. However, regulators in some jurisdictions have also questioned the company’s practices, with the US state of Kentucky issuing a cease-and-desist order saying it violated securities laws and had not disclosed details to customers about the nature of their deposits. Once deposited, digital assets become Celsius’ property.

The rumors surrounding Shalem’s arrest suggested it was in relation to his business with Singulariteam and Hogeg, not Celsius itself. If true, though, effects would ripple through to the various connections, at the very least prompting further (and much-needed) scrutiny of digital asset companies who issue and trade billions of dollars in value.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—a from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple, Ethereum, FTX 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