Vermont’s financial watchdog has become the latest to launch an investigation into Celsius Network, a digital asset lending company that imploded in the past few weeks. The watchdog claims that the firm is deeply insolvent and unable to meet its obligations to investors. The allegations come amid a new report showing the extent to which Celsius gambled with investor funds and how its founders were dumping tokens secretively while calling for users to HODL.
In its consumer alert, the Vermont Department of Financial Regulation (DFR) claimed that Celsius’ withdrawal freeze last month impacted hundreds of thousands of customers, some from the Green Mountain State.
“The Department believes Celsius is deeply insolvent and lacks the assets and liquidity to honor its obligations to account holders and other creditors,” it said.
DFR revealed that it had joined a multistate investigation into Celsius, becoming the sixth state to go after the troubled lender. Other states that are probing the company include Kentucky, Alabama, and Texas.
The watchdog further warned about reported plans by Celsius to file for bankruptcy, pointing out that this would impact investors’ rights and the value of their interest account balances. At the time of the release of the announcement, Celsius had yet to file for bankruptcy, but it now has.
In its filing in New York, the company claimed the decision would be looked back on as a “defining moment, where acting with resolve and confidence served the community and strengthened the future of the company.”
DFR warned Celsius customers against falling for mitigation measures suggested over the Internet, such as placing their accounts on HODL mode, which according to some, is a show of support for Celsius. Others have suggested short squeezing the Celsius native token (CEL), whereby they purchase massive amounts of the token, drive its price up and hurt those that hold short positions on CEL.
Celsius was a ticking time bomb for years, new report shows
For most Celsius users, the withdrawal freeze and subsequent troubles (which have now ended in a bankruptcy filing), caught them by surprise. Many chose to invest with the company as it was much easier than speculative active trading, and the returns were pretty good.
However, as an exposé by the Financial Times shows, the collapse has been a long time coming. The report cites sources such as former employees, investors and business partners who delved into the reckless abandon with which the leaders conducted business and gambled with people’s money.
One of the gaping holes was with CEL, the platform’s native token. To incentivize its users to use CEL, Celsius offered higher interest to customers who chose to receive it in CEL. Being the largest holder of the token, the company could sway the market in anyway it wished. What’s more, the company spent hundreds of millions of dollars buying back CEL tokens from the users.
However, on the side, the top brass at the firm was dumping CEL on unknowing investors. From October 2020, Celsius managers sold back more than $40 million worth of CEL to Celsius. These were the sales of the token, which could be directly traced back to the executives, with blockchain sleuths saying the sales on the open market were tenfold. CEO Alex Mashinsky, for instance, is said to have sold $44 million back to the company which he led.
While CEL handling was suspicious at the very least, it was how Celsius handled customer deposits that led to its downfall. Initially, the firm would lend out its deposits to institutional investors and earn interest, some of which it paid to investors.
However, later, Celsius got greedy. It started investing directly in risky DeFi ventures, which promised even higher yields.
“Investing in DeFi significantly changed the risk profile of what was happening… [it] gives you very high yield for immensely higher amounts of risk,” Simon Dixon, an investor in Celsius who has tens of millions of dollars tied up with the lender, told FT.
Celsius even put novice traders in charge of the trades and gave them autonomy to gamble with customer funds. Some, according to a former employee, were watching videos on YouTube on how to trade.
A compliance review last year also found that the company was not only mishandling money, but it was also lying about it. The review stated that “the company may be inflating its representations of AUM and driving up stock price/token price using false financial information.”
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