By Rae Wee, Elizabeth Howcroft, Alun John and Dietrich Knauth
SINGAPORE/LONDON (Reuters) -Bankrupt crypto lender Celsius Network used investor money and customer deposits to prop up its own token while two of its founders made millions of dollars from token sales, a U.S. court-ordered examiner report released on Tuesday showed.
Crypto lenders such as Celsius boomed during the COVID-19 pandemic, drawing customers by promising high interest rates on their cryptocurrency deposits. New Jersey-based Celsius filed for U.S. bankruptcy in July after freezing customer withdrawals.
U.S. Bankruptcy Judge Martin Glenn, who is overseeing the Chapter 11 case, in September appointed former prosecutor Shoba Pillay as an independent examiner.
She investigated Celsius customers' claims that the company was a Ponzi scheme and also reported on its handling of cryptocurrency deposits.
The examiner's report did not conclude that Celsius was a Ponzi scheme, but it laid out evidence that may lead Glenn to reach that conclusion.
Celsius never generated enough profit to pay the high rewards promised to customers, and Celsius used new customer deposits to fund customer withdrawal requests in June 2022 and perhaps on other occasions, the examiner found.
Celsius Coin Deployment Specialist Dean Tappen said over company chat that he should be called a "Ponzi consultant," and later described Celsius' practice of using customer stablecoins to repurchase its own proprietary tokens as "very Ponzi-like," according to the report. Tappen told the examiner that the "Ponzi consultant" comment was an attempt at a "poor joke" and that he did not believe Celsius was a Ponzi scheme.
Celsius did not immediately respond to requests for comment on the examiner's report. The company said in a Tuesday statement that it cooperated with the examiner's investigation and that it looked forward to working with creditors on a path out of bankruptcy.
Celsius gathered crypto deposits from retail customers and invested them in the equivalent of the wholesale crypto market.
Celsius told customers that its own crypto token, called "CEL," would be used to pay customer rewards, but it concealed the extent to which it propped up CEL's price by re-purchasing the token on secondary markets, the report said.
Starting in 2020, Celsius went on a "buying spree" to push the price of CEL "higher and higher", the report said. Celsius spent at least $558 million buying its token.
By 2022, employees routinely said that the token was "worthless" and questioned whether anyone other that Celsius would buy it, the report said.