Join the most important conversation in crypto and web3! Secure your seat today
Celsius Network 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 U.S. bankruptcy court in New York 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 runup 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 its 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’ 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."
However, Pillay added, "Celsius’ problems did not start in 2022. Rather, serious problems dated back to at least 2020, after Celsius started using customer assets to fund operational expenses and rewards."