Crypto lender Celsius accused of fraud by ex-employee in lawsuit

NEW YORK (BLOOMBERG) - Celsius Network, the crypto lender that froze assets last month, used customer funds to manipulate the price of its proprietary token and lost hundreds of millions of dollars by failing to hedge risk, a former money manager for the company said in a lawsuit.

Celsius amassed more than US$20 billion (S$28 billion) in assets by offering interest rates as high as 18 per cent to customers who deposited their cryptocurrencies. Founder Alex Mashinsky dismissed scepticism about whether that was sustainable, saying the company was able to earn high rates itself. 

But Celsius was, in fact, struggling to cover the payouts and suffered “severe exchange rate losses” due to the fluctuating values of different coins, according to a complaint filed on Thursday (July 7) in a New York state court by KeyFi, the company founded by the former money manager, Mr Jason Stone.

Mr Stone, who called Celsius a Ponzi scheme in the complaint, said it cheated him out of potentially hundreds of millions of dollars in pay. 

The allegations come amid a credit crisis in cryptocurrency markets. Hedge fund Three Arrows Capital was ordered into liquidation last month, broker Voyager Digital filed for bankruptcy this week and other firms offering high-yield products, including Babel Finance and Vauld, have suspended withdrawals. 

Celsius’s customers have been unable to access their funds since June 12. The company said on June 30 that it was considering restructuring its debts.

More than a million people entrusted their savings to Celsius, according to the company. The appeal was obvious: The rates it paid were tens or hundreds of times higher than those for traditional savings accounts. 

Behind the scenes, Celsius was investing customer funds in risky trading strategies, without proper controls, according to the lawsuit. Starting in August 2020, Celsius started transferring hundreds of millions of dollars to KeyFi. 

Though the two firms did not have a written agreement, Mr Stone was given the private cryptographic keys to the funds, meaning he could have run off with them, according to the complaint.

Mr Stone was tasked with investing the money through DeFi. Short for “decentralised finance”, it is a constellation of apps that let users borrow, lend and trade with one another, without middlemen. 

At the time, many of the apps were paying users huge rewards in proprietary cryptocurrencies. KeyFi earned more than US$800 million for Celsius through DeFi strategies, according to the lawsuit. Mr Stone said Celsius was supposed to pay him a 20 per cent share of most of that, but never did.

The problem, according to Mr Stone, was that Celsius mainly took deposits in Bitcoin and Ethereum, but his strategies earned rewards in other coins. This meant that if Bitcoin and Ethereum went up faster than the others, Celsius could end up owing more than it had, even if it was earning money. 

Celsius also kept track of customers’ deposits in United States dollar terms, even if they were actually owed Bitcoin or other tokens, according to the suit. When this error was discovered, it resulted in “a US$100 million to US$200 million hole on its balance sheet”, Mr Stone alleged.

Celsius raised US$50 million in 2018 by selling a proprietary token, CEL, and the company and its executives held large stocks of the cryptocurrency. 

Mr Stone now claims that Celsius in 2020 used US$90 million worth of Bitcoin deposits to “artificially inflate” the price of CEL. He said that the move let Mr Mashinsky “enrich himself” and enabled Celsius to borrow against its CEL holdings. He also said that Celsius borrowed one billion tethers from the stablecoin issuer to cover the hole on its balance sheet.

Mr Stone said he ended his relationship with Celsius in March 2021 once he discovered the improprieties. In a thread on Twitter, Mr Stone wrote that Celsius assured him that it had “risk management and hedging in place”.

“But in late February 2021, we discovered Celsius had lied to us,” he added.