Shoba Pillay was appointed by a New York bankruptcy court to look at whether the crypto lender operated as a Ponzi scheme

Celsius misled its investors – and on occasion used new customer funds to pay for other customers’ withdrawals, the usual definition of a Ponzi scheme, an independent examiner for the New York bankruptcy court said in a Tuesday filing.

In September, Shoba Pillay was asked by the court to offer an outside view of goings-on at the crypto lender, has now published an account of the firm’s operations in the run up to bankruptcy being declared in July.

“In every key respect—from how Celsius described its contract with its customers to the risks it took with their crypto assets—how Celsius ran it business differed significantly from what Celsius told its customers,” Pillay wrote, after interviewing staffers, including former chief Executive Officer Alex Mashinsky, as well as customers of and vendors to the company.

Promises of a community-led lending system offering lavish returns and financial freedom clashed with a reality where the company itself was largely creating the market in native token CEL, and wasn’t open with customers about the risks they faced, Pillay said.

In April 2022, Celsius’s Coin Deployment Specialist Dean Tappen described Celsius’s practices as “very ponzi like,” Pillay said, adding that staff were aware of the discrepancy between internal CEL mechanics and public pronouncements.

On June 12, Celsius paused customer withdrawals and had it not done so, “new customer deposits inevitably would have become the only liquid source of coins for Celsius to fund withdrawals,” Pillay said.

“In some instances, however, between June 9 and June 12, Celsius did directly use new customer deposits to fund customer withdrawal requests,” Pillay said – the usual definition of a Ponzi scheme, where promised returns can’t be sustained from genuine market performance.

In other cases the arrangement was less direct, such as between May and June 2022 when the company had to unwind borrowing after crypto returns were insufficient to fund buybacks of its CEL.

“Celsius recognized that it should not use customer assets to purchase the coins necessary to cover liabilities to other customers,” Pillay said. “It justified its use of customer deposits to fill this hole in its balance sheet on the basis that it was not selling customer deposits but instead posting them as collateral to borrow the necessary coins.”

Another unnamed Celsius manager is quoted as saying “we spent all our cash paying execs and trying to prop up alexs [Mashinsky, sic] net worth in CEL token.”

Pillay said Mashinsky’s claims to the media and on social media to “always have 200% collateral” were “far off the mark, with 14% of Celsius’s institutional loans wholly unsecured.

“What Celsius and Mr. Mashinsky never did was correct the record after the fact for the thousands of live audience members who heard these misstatements or for those who watched the recorded videos on YouTube before they were edited,” Pillay said.

The U.S. bankruptcy code allows the appointment of an independent examiner to examine allegations of fraud or mismanagement by a bankrupt company or its executives. Pillay is a former federal prosecutor and partner at law firm Jenner & Block.

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Ex-CEO Alex Mashinsky, ex-CSO Daniel Leon and CTO Nuke Goldstein pulled bitcoin, ether, USDC and CEL holdings from their custody accounts in May, before the company suspended all customer withdrawals.

Crypto lender Celsius’ top three executives withdrew $56.12 million in cryptocurrency between May and June 2022, right before the company suspended withdrawals and filed for bankruptcy, new court records show.

According to a Statement of Financial Affairs filed late Wednesday, former CEO Alex Mashinsky, former CSO Daniel Leon and CTO Nuke Goldstein withdrew the funds largely from custody accounts in the form of bitcoin (BTC), ether (ETH), USDC (USDC) and CEL tokens (CEL).

Over a dozen other executives, including the company’s Chief Compliance Officer, Oren Blonstein, Chief Risk Officer Rodney Sunada-Wong and new CEO Chris Ferraro did not make any significant withdrawals during that time period, according to the document, one of several filed to the Bankruptcy Court for the Southern District of New York.

Mashinsky withdrew about $10 million in cryptocurrency in May 2022. Leon withdrew about $7 million (and an additional $4 million worth of CEL denoted as “collateral”) between May 27 and May 31. Goldstein withdrew around $13 million (and an additional $7.8 million worth of CEL also denoted “collateral”).

Celsius filed for Chapter 11 bankruptcy protection in July after it halted all user withdrawals citing “extreme market conditions” a month before.

Wednesday’s documents are the latest development around the beleaguered crypto lender as its bankruptcy case heats up. An independent examiner, appointed by the U.S. Trustee’s office, is currently investigating why Celsius fell apart and how it managed and stored customer deposits.

Mashinsky and Leon resigned from the lender within the last two weeks. Earlier this week, the Financial Times reported that Mashinsky withdrew $10 million in crypto before Celsius froze withdrawals.

Key members of the lender’s management talked about fresh restructuring plans that involved turning the firm’s debt into tokens and a potential pivot to crypto custody, according to audio recordings leaked to the media. However, the court is moving forward with auctioning off Celsius’ assets later this month.

The bankruptcy court ordered Celsius to update the Unsecured Creditors Committee (UCC), which represents all customers whom Celsius owes assets, about its financial status and cash management on a regular basis, according to another court document filed Wednesday.

The lender must disclose its monthly budget and cash balance, spending on wages, taxes among other figures, and various performance metrics about its bitcoin mining business and any proceedings from sales of BTC mined by the firm’s mining facilities.

The firm also must obtain permission from the UCC for any “critical vendor payment” above $50,000.

The next hearing for the bankruptcy case is scheduled for later this week, Oct. 7 at 10 am E.T.

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Voyager’s and Celsius’ bankruptcies were preceded by announcements that they were barring customers from getting their money.

Bank runs are nothing new. Those frightening incidents when too many customers demand their money back at the same time have destroyed many financial institutions over the years.

Traditional banks largely solved that with deposit insurance, a guarantee from the Federal Deposit Insurance Corp. to make customers whole up to a certain amount if their bank fails.

With no such protection in crypto, the phrase “suspending withdrawals” has become a source of fear in 2022, a sign of deep trouble at firms that have tried to create a modern version of banking through digital assets. Customers who trusted the lender or exchange with their cryptocurrencies are suddenly unable to get the assets back.

One example is crypto broker Voyager Digital. Its Canadian-listed stock plunged 42% on July 4 after it said it was “temporarily suspending trading, deposits, withdrawals and loyalty rewards.” The situation got worse days later when the company filed for bankruptcy.

Voyager’s troubles came as crypto prices remained hugely depressed from their peaks. And it illustrates that when a crypto firm pauses withdrawals – warning the world of serious liquidity issues – it will have trouble restarting them outside of bankruptcy court.

“The problem is, once the withdrawal suspensions happen, it’s too late for the investors,” said Paul McCaffery, co-head of equities for Keefe, Bruyette & Woods.

When crypto lenders go broke
Following the collapse of the stablecoin terraUSD (UST) and the implosion of crypto hedge fund Three Arrows Capital, known as 3AC, a swath of liquidity-strapped crypto lenders found that they could no longer meet customer demands.

Throughout June and early July, lenders including Celsius Network, Babel Finance, CoinFLEX, Voyager, Vauld and Zipmex halted withdrawals and transfers. Others such as CoinLoan and Finblox allowed withdrawals to continue, but at a reduced limit.

When crypto lenders go broke, the traditional financial regulatory system can’t help. The FDIC, which backstops deposits at conventional banks in the U.S., released a fact sheet on July 29 reminding the public of that.

Some lenders, such as Zipmex, have been able to recover and start releasing select tokens back to users’ wallets. The majority of lenders, however, have kept withdrawals paused, with Celsius joining Voyager in bankruptcy.

No one can predict how far the domino effect of solvency issues will run, but it’s a safe bet crypto players will shudder if any other firms warn they are suspending withdrawals.

“The announcements are decelerating but not likely quite done yet as the fallout from the 3AC solvency continues to play out,” McCaffery wrote in an email to CoinDesk. “I am hopeful that all of this bloodshed will result in better risk management processes embedded in the business models going forward.”

Timeline of suspended withdrawals
June 12: Celsius says that it is “pausing all withdrawals, swaps and transfers between accounts.” (Celsius filed for bankruptcy on July 13.)
June 17: Babel says that “redemptions and withdrawals from Babel Finance products will be temporarily suspended.”
June 23: CoinFLEX announces that it is “pausing all withdrawals.”
July 1: Voyager Digital says that it is “temporarily suspending trading, deposits, withdrawals and loyalty rewards.” (Voyager filed for bankruptcy on July 5.)
July 4: Vauld says that it “made the difficult decision to suspend all withdrawals, trading and deposits.”
July 20: Zipmex says that it is “pausing withdrawals until further notice.”

The post Want to Strike Terror in Crypto Markets in 2022? Just Say You’re Suspending Withdrawals appeared first on Crypto Insider.

Celsius Mining said in March that it intended to go public.

Celsius Network’s mining unit, which said in March it planned to go public, filed for Chapter 11 bankruptcy protection, along with its parent company, in the U.S. Bankruptcy Court for the Southern District of New York.

The mining unit of the troubled lender said in March it had filed a confidential S-1 draft registration with the U.S. Securities and Exchange Commission (SEC), to take the company public. At the time shares of most publicly traded crypto mining companies were tumbling, with the broader market selloff.

Fast forward to summer, with the continued bear market, miners were forced to sell their mined bitcoins to pay for their operating costs and some industry participants expected lot of miners to turn to M&A to survive the down turn as some faced debt crisis. Celsius Mining’s bankruptcy filing is likely to be another blow to investor sentiment in the mining sector.

Celsius Mining’s IPO process wasn’t a successful option as investors couldn’t get past the possibility of litigation risk while the parent company paused customer withdrawals and faced bankruptcy, according to a person familiar with the mining unit’s IPO process.

The unit also faced similar investor sentiment while seeking potential “rescue financing” which would bail out the miner, if the IPO fell apart, according to the person, who didn’t want to be identified.

Celsius Mining has been active in the industry via investing and lending as well as helping host the miners to which it lends. In March, bitcoin (BTC) miner Mawson (MIGI) signed a 100-megawatt co-location and $20 million debt deal with Celsius Mining.

Last year Celsius Mining said it invested a total of $500 million for its bitcoin mining operations in North America.

The post Celsius’ Mining Unit Files for Bankruptcy Just Months After Announcing IPO Intention appeared first on Crypto Insider.

The troubled crypto lender paid down $183 million of its debt to the decentralized exchange Maker, blockchain data shows, possibly in a bid to recover bitcoin-linked collateral that otherwise would remain trapped.

Celsius, the crypto lender that’s halted withdrawals and is reportedly cutting jobs to stave off a liquidity crisis, has been aggressively repaying debt on one of the largest decentralized-finance protocols, blockchain data shows – possibly to get back bitcoin-equivalent tokens that had been posted on the platform as collateral.

Since July 1, according to the on-chain data, Celsius has paid down $183 million of its collateralized debt to Maker, one of the largest decentralized lending platforms. The debt was repaid in the Maker protocol’s native stablecoin, DAI.

The transactions resulted in not only the extinguishment of the debt but the release from Maker of 2,000 wrapped bitcoin (worth $40 million) that had been posted as collateral, the data shows.

Wrapped bitcoin (WBTC) is a token configured for the Ethereum blockchain that represents bitcoin (BTC) – the largest cryptocurrency and thus one of the most liquid.

Celsius still owes 41 million DAI (about $41 million worth) in loans to Maker, but it has about 22,000 wrapped bitcoin (about $440 million worth) posted against those loans – so there could be an even bigger potential kicker if the rest of the debt were repaid.

“By repaying the debt, Celsius is possibly freeing up collateral (BTC) that then can be sold on centralized exchanges or via over-the-counter to meet creditor demands and customer withdrawals,” Fundstrat analyst Walter Teng told CoinDesk.

“Given that DeFi loans are overcollateralized, it makes sense for them to do this, as the value unlocked from paying back their loans (collateral less loans) is greater than the value of the loans themselves (should they opt to not repay).”

Celsius representatives didn’t immediately return emails requesting comment on the blockchain data or the transactions.
CoinDesk – UnknownCelsius paid down $183 million of its debt to Maker since July 1. (DeFi Explorer)

The beleaguered crypto lender is scrambling to protect and preserve its assets to avoid insolvency, after a hit to its finances from the implosion of the Terra blockchain and its UST stablecoin in May, and then in June from the failure of the once-top tier crypto hedge fund Three Arrows Capital.

Celsius suspended withdrawals and transactions for its ​​1.7 million users starting on June 12, hired restructuring consultants and reportedly cut 150 jobs. Regulators have opened investigations of the company.

The native token of the Celsius platform, CEL, has tumbled 80% this year.

As of May 2022, the firm had lent out more than $8 billion to clients and had $12 billion in assets under management.

Loans on decentralized finance platforms such as Maker are generally overcollateralized, which means that the borrower pledges more assets in value to the lender than the value of the loan.

Another benefit of the loan paydowns is that it reduces the price point (of wBTC) at which the Celsius collateral would automatically be liquidated by the Maker protocol.

After the payments, the liquidation level of the Celsius wBTC collateral dropped to $2,774, according to the website DeFi Explore. WBTC now trades at $20,200, making the loan 1,101% (about 10 times) overcollateralized.

The post Celsius Repays $183M on DeFi Exchange Maker, Gets Back Collateral, Blockchain Data Shows appeared first on Crypto Insider.

The Texas State Securities Board (TSSB) has had the lending platform in its crosshairs for nearly a year.

Several U.S. states including Texas and Alabama are investigating Celsius Network’s decision to halt customer withdrawals.

On June 12, the crypto lending platform published a blog post announcing that it would pause withdrawals, as well as its swap and transfer products, citing “extreme market conditions.” Rumors of the company’s insolvency spread quickly across social media, sparking panic and sell-offs in the markets.

Joe Rotunda, the director of enforcement at the Texas State Securities Board (TSSB) , told CoinDesk that his team learned of the account freeze through social media and met early on Monday morning to begin the investigation.

“I am very concerned that clients – including many retail investors – may need to immediately access their assets yet are unable to withdraw from their accounts,” Rotunda said to Reuters. “The inability to access their investment may result in significant financial consequences.”

Joe Borg, the director of the Alabama Securities Commission, told CoinDesk he sees the investigation into Celsius’ freezing of customer accounts as a “new wrinkle” in an ongoing investigation.

“We’ve been working with Celsius for a while,” Borg told CoinDesk. “We’ve asked for lots more information, and they’re providing it.

“We’ll continue the investigation as to the company and whether or not we’re going to do the BlockFi model – whether they’re capable of it,” Borg added, referencing BlockFi’s $100 million settlement agreement with the U.S. Securities and Exchange Commission (SEC) and 32 states reached in February.

This is not Celsius’ first brush with Texas’ state securities regulators, who began looking into the platform’s crypto interest accounts – which advertised returns of up to 17% – last September.

Other states – including New Jersey, which filed a cease-and-desist order against Celsius – quickly followed suit.

The investigations of Celsius are mirrored by ongoing state-level investigations of the lending platform’s competitors, including BlockFi and Voyager.

The post Texas, Other States Open Investigation Into Celsius Network Following Account Freeze appeared first on Crypto Insider.

Celsius announced early Monday it would pause withdrawals along with its swap and transfer products, citing “extreme market conditions.”

Crypto lending firm Celsius has hired lawyers specializing in business restructuring to help it navigate its thorny financial situation, The Wall Street Journal reported Wednesday, citing people familiar with the matter.

Lawyers from the Philadelphia-based Akin Gump Strauss Hauer & Feld LLP are working with Celsius, which at its peak held over $10 billion in client assets, the report said.

Celsius took the dramatic step of freezing account withdrawals Monday amid the broader crypto market downturn.
The company did not immediately respond to a request for comment.

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Nexo offered to buy some assets from lending competitor Celsius to ensure obligations to customers can be met.

Cryptocurrency lending platform Nexo said it’s interested in buying certain assets from rival Celsius, in particular its collateralized loan portfolio.

The announcement came in response to Celsius’ decision to freeze withdrawals and transfers, citing extreme market conditions.

In a letter to Celsius on Monday, Nexo offered to buy “substantially part of or all of the remaining qualifying assets … comprising mostly or fully of collateralized loan receivables secured by corresponding collateral assets, as well as brand assets and the customer database.”

Nexo, based in Zug, Switzerland, publicized the letter, which didn’t mention a price, in a tweet.

Unlike Celsius, which reports platform inflows and outflows on a weekly basis, Nexo provides a real-time audit of custodial assets.

In its recent audit, Nexo revealed that it had $6.2 billion in customer liabilities. It held assets in excess of that amount.

The Nexo token price is down by 22% in the past 24 hours amid a market-wide sell-off. Celsius’ CEL token has lost more than 50% of its value following its announcement earlier Monday.

Celsius, which is headquartered in New Jersey and has a subsidiary in London, had not responded to requests for comment by publication time.

The post Nexo Proposes Celsius Buyout as Rival Lending Platform Halts Withdrawals appeared first on Crypto Insider.

The company will also pause its swap and transfer products, according to a blog post. It did not provide a timeline for resuming withdrawals.

Crypto lending service Celsius announced early Monday it would pause withdrawals, citing “extreme market conditions.”

The company announced it would also pause its swap and transfer products, according to a blog post. It did not provide a timeline for resuming withdrawals.

“We are working with a singular focus: to protect and preserve assets to meet our obligations to customers. Our ultimate objective is stabilizing liquidity and restoring withdrawals, Swap, and transfers between accounts as quickly as possible. There is a lot of work ahead as we consider various options, this process will take time, and there may be delays,” the blog post said.

The announcement comes on top of Celsius telling nonaccredited investors that they could no longer transfer funds.

The company also recently replaced its Chief Financial Officer, after former CFO Yaron Shalem was arrested by Israeli police in 2021.

The price of Celsius’s CEL token fell over 50% after the news came out.

The company has also faced regulatory issues, with law enforcement entities issuing cease-and-desist orders against it.

Crypto reporter Colin Wu, who goes by @WuBlockchain on Twitter, posted on Monday that Celsius has transferred about 104,000 ETH to FTX in the past three days.

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