• Celsius freezes customer funds
• Filed for Chapter 11 bankruptcy
• Buyback of CEL tokens
Celsius falls victim to weak crypto market
In the summer of 2022, crypto lender Celsius began to falter after stablecoin Terra/LUNA crashed, dragging down the entire crypto market. The company informed its customers in mid-June that due to payment difficulties, customer funds had to be frozen and thus refused to be paid out in order to support its own CEL token. Then, in July, Celsius announced it had filed for Chapter 11 bankruptcy. Celsius invested funds borrowed from customers into the crypto market and in return promised reward payments in the form of the CEL token.
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Celsius business model under review
A lot has happened since then. Not only has the crypto crash claimed numerous other victims, there is also news at Celsius. Bankruptcy judge Martin Glenn, who is overseeing the Celsius case, appointed former prosecutor Shoba Pillay as an independent examiner in September 2022, Reuters reported. Pillay should investigate to what extent the allegations from Celsius customers that this is a Ponzi scheme have acted. Now the result is available.
Celsius profit too low for premium payments
Pillay found that at no point did Celsius generate enough profit to pay its customers the promised rewards, according to Reuters. Between 2018 and June 30, 2022 alone, commitments to users of the service were $1.36 billion, significantly more than the net revenue that came from customer deposits. “The business model that Celsius advertised and sold to its customers was not the business that Celsius actually operated,” the lawyer wrote.
Accordingly, in June 2022, the company used new customer deposits to fund withdrawals. Celsius may have done the same on other occasions, the report says.
Insiders benefited from CEL buyback
By buying back CEL tokens starting in 2020, Celsius has also supported and boosted the price of its own cryptocurrency on the secondary markets, Pillay added. Celsius is said to have invested at least 558 million US dollars in the purchase of its own coin. Insiders in particular, who held a large part of the digital coins, are said to have benefited from this. Celsius founders Alex Mashinsky and Daniel Leon reportedly made $68.7 million and at least $9.7 million in profits, respectively, using this approach, according to the auditor. Mashinsky is currently facing fraud charges in the US and resigned as the company’s CEO in September. According to the report, he is said to have repeatedly made false claims to customers about how records from executives of the crypto lender go back. However, customers were not informed about the misinformation. Mashinsky has since been replaced by interim CEO Chris Ferraro. According to the current status, Leon is still active as Chief Security Officer.
No evidence of Ponzi scheme
Dean Tappen, who is Celsius’ Coin Deployment Specialist, is also said to have referred to himself in company chats as “an advisor on a Ponzi scheme,” according to the report. He also assessed the procedure of using customer deposits to buy back their own tokens as “similar to a pyramid scheme”. However, Tappen told Pillay that it was a “bad joke” and that he didn’t think Celsius was a Ponzi scheme. The examiners also found no evidence that the crypto lender could actually be a pyramid scheme.
Restructuring is to be continued
Celsius did not comment on Pillay’s report, but said it had been supportive of the examiner. “As part of our Chapter 11 process, Celsius and our advisors have worked diligently to provide information to the investigator during her investigation,” the company’s Twitter account said. “Under the new leadership of our interim CEO Chris Ferraro and the Special Committee, we are moving forward on our transformation and look forward to continuing to work with UCC [Gläubigerausschuss, Anm. d. Red] and all stakeholders to maximize the value of the asset.”
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