Firefighter has pension funds locked up in bankrupt crypto lender

Chapman Shallcross had been burned before. Father of present Bachelorette contestant Zach Shallcross, he spent 34 years in the fire service, retiring from his job as a fire captain for the city of Orange, California after health issues caught up with him in 2020.

The elder Shallcross considers himself a hands-on, blue-collar kind of guy, but when his reality star son tipped him off to the cryptocurrency world, he quickly became fascinated by the technology’s potential.

Now the elder Shallcross is one of nearly 1.7 million people around the world whose assets are frozen in the Celsius Network, a cryptocurrency lender that promised to be safer than a bank. Celsius froze more than $4 billion in assets on June 12. A month later, it filed for Chapter 11 bankruptcy protection, making it one of a handful of crypto firms that imploded during the latest market crash.

Many in the cryptosphere refer to the demise of Celsius, Voyager and Three Arrows Capital as a “Lehman Brothers moment” for the industry, a nod to the investment bank that collapsed during the subprime mortgage crisis of 2008. Before the crash, the subprime mortgage industry was worth $1.3 trillion . Today’s crypto industry is worth much more – and is not nearly as regulated.

“I thought [Celsius] would be a solid place to put my cryptocurrency; and as it turns out, it’s not, and it’s horrible,” Shallcross shared LA Times.

Also caught up in the Celsius mess are doctors, actors, crypto-enthusiasts, working-class people and even Canada’s second-largest pension fund, the Caisse de Dépôt et Placement du Québec, which has about $150 million locked up in Celsius.

Shallcross began investing in cryptocurrencies in 2018. He started slowly, but after he retired in 2020, he withdrew all his retirement savings from his state-run CalPers account and bought Ethereum and Cardano, two cryptocurrencies. Shallcross first held his crypto on the exchange BlockFi, but in December 2021 he transferred it to the Celsius Network, which promised a return program with returns as high as 17%. He planned for the investment to sit in his Celsius account for about five to seven years before withdrawing it. But on June 12, he discovered that he was suddenly unable to withdraw money from his Celsius account. He has more than $400,000 locked up in his Celsius account.

“I just want access to my cryptographer,” Shallcross said over the phone on his way home to Anaheim from a camping trip in Big Bear. “I want to be able to do it [Celsius]which, by the way, is the Celsius promised.”

Unsecured loans

Celsius was founded in 2017 by Alex Mashinsky. Wearing a black T-shirt with “Banks are not your friends” emblazoned on it, Mashinky hosted weekly ask-me-anything sessions with Celsius customers. He argued that Celsius was able to achieve high returns for customers by operating in the same way as a bank. Users can deposit various cryptocurrencies or US dollars in Celsius. Celsius then lent the assets to financial institutions willing to pay high interest rates on the short-term loans. This was called “Serve the Service” for Celsius users.

Celsius encouraged international users to take the interest payment in the form of its own cryptocurrency, the CEL token, for a higher return. CEL is not legally traded in the US In the terms and conditions of the Celsius Network, users did not simply deposit their money as they would in a bank. Technically, they lent digital assets to Celsius, essentially making user deposits into unsecured loans. Buried in its terms of service, Celsius stated that if the company were to go bankrupt, users’ assets “may not be recoverable” and users “may have no legal remedies or rights.”

James Murrow also found Mashinsky compelling. Murrow and his wife, Hui, have more than $60,000 locked up in their combined accounts. The two recently moved from the Bay Area to Oklahoma due to California’s high cost of living. Murrow’s biggest concern about Celsius is that the “little guys” will be stuck with the bill again.

“Alex Mashinsky really tells a great story,” Murrow shared The times. “Unfortunately for him, he’s lied. He’s lied a lot. It turns out it was all kinds of risky investment that [Celsius was] do with our money.”

The California Department of Financial Protection and Innovation also took notice of Mashinky’s actions. In a cease and desist order issued on August 8, DFPI states that more than 48,000 Californians with assets worth $650 million are implicated in Celsius’ frozen assets. DFPI ordered Celsius to stop offering securities to customers based in California while making “false statements of material facts or omissions of material facts.”

The order also alleges that Mashinky itself misled users. “Mashinsky represented on several occasions that even in the worst-case scenario, Earn Rewards investors would be able to withdraw their investments in time and not suffer losses on their investments, and continued to make representations that it was safe to deposit assets with Celsius even in the days leading up to the company’s decision on 12 June 2022 to suspend customer withdrawals,” the order states.

Check Twitter

Celsius was asked to respond to Murrow’s comment and the DFPI order The times to its blog and Twitter account, both of which advise users on the status of Celsius’ bankruptcy proceedings.

The government can do little to combat faltering economic advice. A multitude of YouTubers, TV pundits and Twitter users offer all kinds of financial advice at all hours of the day and night. Laws governing crypto firms like Celsius are quite piecemeal and left mostly to the states. The FDIC, which insures bank deposits up to $250,000, offers no such protection for investments in crypto institutions.

Celsius is currently under investigation in Texas, Alabama, Kentucky, New Jersey and Washington. New Jersey issued a cease and desist order against Celsius effective November 1, 2021, alleging that the company sold unregistered securities in violation of New Jersey law. Celsius is headquartered in New Jersey, where at least one class action lawsuit has already been filed against the firm. In New York, Attorney General Letitia James is urging New Yorkers who believe they may have been scammed by Mashinsky or other cryptocurrency platforms.

On August 3, a bill was introduced in the Senate that would bring crypto regulation under the Commodities Futures Trading Commission. The much better funded Securities and Exchange Commission currently does the most crypto enforcement. The SEC does not comment on the existence or non-existence of possible investigations, a spokesperson said The times.

Shallcross is torn about the possibility of regulation for the crypto industry. He likes and believes in the decentralized, anti-government aspects of cryptocurrencies and blockchain technologies. He does not plan to sell his crypto even if he is able to get it back. He’s in it for the long haul, he said. In the cryptosphere, he is “HODLing” or “holding on for dear life”.

“I think decentralization is good, and I think blockchain technology and cryptocurrency can be good,” Shallcross said. “But when you’re slapped in the face with losing your entire retirement savings, you can’t help but say, ‘Hey, I sure wish there was some kind of regulation that would have prevented this.’ “