Was Celsius a Ponzi scheme? Federal judge orders probe

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The unwinding of the Celsius Network has been the subject of much speculation in recent months. Many have begun to wonder if it was one giant scam all along.

After the digital currency lending platform filed for Chapter 11 bankruptcy, many who were burned by it, including DeFi platform KeyFi, accused it of operating like a classic Ponzi scheme, using new user deposits to pay yields and enable withdrawals.

Now, a U.S. federal judge overseeing the Celsius case has ordered a formal probe into whether or not the firm was operating like a Ponzi. They ordered the examiner and the official committee of Celsius creditors to determine who would head the probe.

Difficult questions about lending platforms and DeFi protocols

The disaster surrounding Celsius Network and other bankrupt lending platforms has led to a rude awakening in the industry. Many have begun questioning how lending platforms and yield farms make their profits to pay users’ yields and have realized something doesn’t add up.

Long before the current crisis, critics of the industry have outright accused major players of operating just like a classic Ponzi dressed in new technical terms—old wine in new bottles.

While in DeFi yield farms, many payments are made with new tokens or ’emissions,’ lending platforms like BlockFi and Celsius have a tougher time explaining how they can afford to pay yields multiple times greater than those paid by most sovereign or corporate bonds.

At times, when withdrawal requests have come thick and fast, platforms have resorted to offering double-digit percentages to depositors of stablecoins like USDT and USDC, raising questions about how they can afford this.

One of many shady operations in the digital currency space

Celsius Network is only one of many shady digital currency operations that have recently collapsed. Since the start of this year, the following firms and organizations have become insolvent.

Terraform Labs imploded after its stablecoin UST, and the linked digital token LUNA crashed virtually overnight, wiping tens of billions off the digital currency markets and ruining countless lives. The company is currently under investigation by South Korean authorities, and its founder Do Kwon is missing.

Digital currency hedge fund Three Arrows Capital (3AC) went bankrupt after an empire built on derivatives and leverage unwound spectacularly. This was due, at least in part, to what happened to UST and LUNA. Founders Su Zhu and Kyle Davies remain at large today.

Voyager Digital, a trading platform that paid yields of up to 12% to depositors, went bankrupt in the summer. Like Celsius Network, it filed for Chapter 11 bankruptcy in an attempt to restructure. This form of bankruptcy also means users have no recourse to their funds until everything is settled.

If this sounds like a horror show, it’s only the tip of the iceberg. Upon closer inspection, the more than one trillion dollars in market cap still in digital currencies is propped up by a stablecoin (Tether) issued by a company under investigation by the U.S. Department of Justice for bank fraud. To this day, its executives refuse to submit to a proper audit and prove Tether is backed by real assets. If it turns out to be a giant Ponzi scheme, as many alleged, what we’ve seen so far will look like a blip on the radar.

Digital currency enthusiasts beware: crocodiles lurk in these waters

Time will tell if Celsius Network fits the legal definition of a Ponzi scheme, and this formal investigation will settle it once and for all. Whatever the truth turns out to be, one thing is certain. There are many other such schemes lurking in the digital currency industry, and users should be suspicious of any firm that promises unreasonably high yields in return for taking custody of digital coins.

As Tiffany Fong and other Celsius Network users found out the hard way, all is not as it appears in ‘crypto.’ Oftentimes, the promises made by characters like Alex Mashinsky are cleverly crafted lies.

According to an inside source at @CelsiusNetwork, Alex Mashinsky falsely claimed to invest $18M into CEL’s ICO to attract new investors, but never actually invested his own or AM Venture’s funds. Was @Mashinsky committing fraud from day one? The SEC is currently investigating.

— Tiffany Fong (@TiffanyFong_) October 26, 2022

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