Now-frozen crypto-lending biz Celsius accused of devolving into a Ponzi scheme

That's stone cold

An ex-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.

Netizens were told they could earn interest on 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 its trades to produce those interest fees. When the crypto market crashed last month, amid general economic uncertainty, Celsius froze all withdrawals, swaps, and transfers on its network. 

Now, one of its former asset managers has alleged in a filing to the New York County Supreme Court that this all devolved into nothing more than a grubby, unsustainable Ponzi scheme. Jason Stone, the CEO and founder of KeyFi, who managed billions of dollars worth of cryptocurrency investments on behalf of Celsius from August 2020 to March 2021, said Celsius began to fall apart when the prices of digital assets, such as Ethereum and Bitcoin, soared at the start of last year.

At that point, Celsius' customers started withdrawing their holdings to sell high and bank a fat profit. Celsius, however, 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 attempt to attract new customers to inject more cryptocurrency to its platform, Celsius started offering double-digit interest rates. 

"[These] funds were used to repay earlier depositors and creditors. Thus, while Celsius continued to market itself as a transparent and well capitalized business, in reality, it had become a Ponzi scheme," Stone's KeyFi stated in its lawsuit [PDF] against Celsius. Short on cash, Celsius allegedly failed to pay money that was owed to Stone.

Celsius is thus accused of breach of contract and fraud. "Celsius made materially misleading statements and omissions, calculated to lead Plaintiff to believe that Celsius was a legitimate business with proper security and truthful disclosures to its customers," the lawsuit alleged. Stone and KeyFi biz reportedly lost out on millions of dollars owed for their employment. 

Stone and his KeyFi team managed Celsius' funds from a newly created Ethereum wallet. He was given permission to purchase NFTs using money from that account as part of a pre-payment agreement, we're told. When he quit in March the account was taken over by Celsius' CEO Alex Mashinsky, who then apparently transferred the NFTs to another wallet belonging to his wife, it is claimed.

Celsius took out loans against other coins, such as Tether, in an effort to return customers' assets. "The Tether loan, alongside other Celsius deposits, has been used to cover up the fact that Celsius is, in fact, balance sheet insolvent, with less money in its coffers than it owes its depositors," it was alleged.

Then in May, so-called stablecoin Terra crashed, further weakening confidence in the cryptocurrency market and prices continued to fall. Celsius paused all withdrawals and transfers between accounts a month later, blaming it on "extreme market conditions."

"Celsius took this drastic action because it did not (and still does not) have enough crypto-assets on hand to balance the obligations it owes to its clients. Just days prior to this announcement, on June 7, 2022, Celsius claimed that it 'has 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 made to the plaintiff concerning its risk management," the lawsuit claimed.

The Register has asked Celsius for comment. ®

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