Crypto-lending biz Celsius accused of being a Ponzi scheme • The Register

A former employee of Celsius Network, the cryptocurrency lending platform that recently suspended all transactions, this week accused the company of operating as a Ponzi scheme in a lawsuit.

Internet users were told that they could earn interest on the cryptocurrencies they put into Celsius. The biz generated that return by investing people’s funds in the cryptocurrency market. Celsius needed to make enough money on his trades to produce these interest charges. When the crypto market crashed last month, in the midst of general economic uncertainty, Celsius froze all withdrawals, exchanges and transfers on the network.

Now one of its former asset managers has claimed in a case before the New York County Supreme Court that all this turned into something more than a dirty, unsustainable Ponzi scheme. Jason Stone, CEO and founder of KeyFi, which managed billions of dollars worth of cryptocurrency investments on behalf of Celsius from August 2020 to March 2021, said that Celsius began to fall apart when the prices of digital assets, such as Ethereum and Bitcoin, rose . at the beginning of last year.

At that time, Celsius’ customers began to pull out their holdings to sell high and knock down a lucrative profit. However, Celsius allegedly did not have enough funds to cover these transactions, and was forced to buy cryptocurrencies at a loss to return people’s assets. In an effort to attract new customers to inject more cryptocurrency into the platform, Celsius began offering double-digit interest rates.

“[These] funds were used to repay former depositors and creditors. While Celsius continued to market itself as a transparent and well-capitalized business, it had in fact become a Ponzi scheme, “Stones KeyFi said in its lawsuit. [PDF] against Celsius. With little money, Celsius reportedly failed to pay money due to Stone.

Celsius is thus charged with breach of contract and fraud. “Celsius made significantly misleading statements and omissions, intended to lead the plaintiff to believe that Celsius was a legitimate business with proper security and truthful disclosures to its customers,” the lawsuit claimed. Stone and KeyFi biz reportedly lost millions of dollars due to their employment.

Stone and his KeyFi team managed Celsius’ funds from a newly created Ethereum wallet. He was given permission to buy NFTs by using money from that account as part of a prepayment agreement, we are told. When he left in March, the account was taken over by Celsius’ CEO Alex Mashinsky, who then apparently transferred the NFTs to another wallet that belonged to his wife, it is claimed.

Celsius took out loans against other coins, such as Tether, in an attempt to return customers’ assets. “The Tether loan, along with other Celsius deposits, has been used to cover up the fact that Celsius is in fact insolvent in the balance sheet, with less cash in hand than it owes depositors,” it was alleged.

Unfortunately, stablecoin Tether lost its dollar bond and crashed in May 2022, causing a ripple of effects in the broader cryptocurrency market. Celsius stopped all withdrawals and transfers between accounts a month later, blaming “extreme market conditions”.

“Celsius took this drastic action because it did not (and still does not have enough cryptocurrencies at hand to balance the obligations it owes its customers. Just days before this announcement, June 7, 2022, Celsius claimed that they ‘have the reserves to meet obligations, as dictated by our comprehensive liquidity risk management framework.’ This turned out to be a lie. This lie was also consistent with the representations Celsius gave to the plaintiff regarding risk management “, the lawsuit claimed.

The register has asked Celsius for comment. ®