Bankruptcy Probe: Celsius Cheated Investors 'from The Start'

A court-appointed examiner investigating the collapse of cryptocurrency biz Celsius has issued a report of her findings, which are wrapped up in the very first sentence of its executive summary.

"The business model Celsius advertised and sold to its customers was not the business that Celsius actually operated," attorney and independent examiner Shobal Pillay said of her findings. 

Later she notes in the 476-page damning report [PDF] "Behind the scenes, Celsius conducted its business in a starkly different manner than how it marketed itself to its customers in every key respect. Celsius abandoned its promise of transparency from its start."

From its inception as a public company, Celsius lied by concealing from investors it failed to meet its $50 million earnings target from its initial coin offering, or ICO, of its company CEL tokens, she alleges. 

"Despite its promises of transparency, Celsius debated internally whether to tell its community how the ICO actually turned out but decided not to do so because it feared its community would be upset," Pillay said in the report, which noted that former CEO Alex Mashinsky promised to buy the unsold tokens from the ICO, but never did so. 

Within a couple of years of the company's 2018 initial CEL coin offering, Celsius had substantially expanded its purchase of its own currency, and was doing so in a way that propped up the price to hide the fact that most of the market was coming from Celsius' own purchase of its coins. 

Celsius, which was founded to act as a loan platform where cryptocurrency owners could deposit their coins to be lent to others in exchange for a percentage of the interest paid on the loans, began breaking down in June of last year when it froze withdrawals, swaps and transfers amid a larger crypto downturn.

Celsius never earned enough on its cryptocurrency deployments to fund the CEL buybacks necessary to pay customers their interest rewards, the report found, and "as a result, it began using customer-deposited Bitcoin (BTC) and Ether (ETH) to fund its CEL purchases." 

If it walks like a Ponzi, quacks like a Ponzi …

It didn't take long after Celsius froze withdrawals that it began to be accused of being a Ponzi scheme which, you may recall, involves using money from new investors to pay off earlier investors. 

A former Celsius employee alleged in July that the company devolved into a Ponzi scheme when Ethereum and Bitcoin prices started climbing in 2021 and the company didn't have the cash to pay its investors the CEL they were due. 

The report doesn't conclude that Celsius was a Ponzi scheme but leaves heavy allowance for interpretation, most of which is drawn from the statements of Celsius' own people. 

Celsius' Coin Deployment Specialist Dean Tappen, according to the report, said Celsius' habit of using customer stable coins to buy CEL was "very Ponzi like," and a few weeks later told Celsius' VP of treasury that cash to buy CEL was coming from "users like always." 

• Crypto lender Celsius in Chapter 11 deep freeze
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• FTX collapse prompts other cryptocurrency firms to suspend withdrawals
• Now-frozen crypto-lending biz Celsius accused of devolving into a Ponzi scheme

Celsius filed for chapter 11 bankruptcy in July of last year. The company recently proposed reorganizing into a publicly-traded "recovery corporation" that, honestly, sounds like an additional scam waiting to happen.

Accordion to Coindesk, Celsius lawyers said in court last week that the as-yet unapproved plan would award creditors "with locked assets above a certain threshold" another type of token called an Asset Share Token (AST) that would "reflect the value of their assets" tied up in Celsius. 

Holders of newly-minted ASTs could sell them on the open market, or hold onto them in the hope of earning dividends. Everyone else, which the company said would amount to 60 to 70 percent of Celsius customers, would receive a one-time payout in liquid cryptocurrency.

That payout, of course, would be at a discount, as Celsius lawyers said they don't envision a full recovery, but a "meaningful" one. 

The next scheduled hearing in Celsius' bankruptcy trial is scheduled for February 6, and parties that wish to make a claim against the company have until February 9 to file necessary paperwork. ®