Celsius Used New Customer Funds to Pay for Withdrawals: Independent Examiner

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."

Another unnamed Celsius manager is quoted as saying “we spent all our cash paying execs and trying to prop up alexs [Mashinsky, sic] net worth in CEL token.”

Despite repeatedly saying he was not selling CEL, and despite employees internally saying the token’s true value was zero, Mashinsky sold 25 million tokens to the value of at least $68.7 million between 2018 and bankruptcy, Pillay said. Co-founders Nuke Goldstein and S. Daniel Leon are cited as making CEL sales valued at $2.8 million and $9.74 million respectively.

Pillay said Mashinsky’s claims to the media and on social media to “always have 200% collateral” were “far off the mark," with 14% of Celsius’ institutional loans wholly unsecured in December 2020. That figure rose to nearly 36% by mid-2021 – and even then some of the collateral was in unstable assets such as FTX’s FTT token, Pillay said.

“What Celsius and Mr. Mashinsky never did was correct the record after the fact for the thousands of live audience members who heard these misstatements or for those who watched the recorded videos on YouTube before they were edited,” Pillay said.

Pillay also uncovered “significant tax compliance deficiencies” in the company, saying that its mining arm may owe over $23.1 million in use taxes, and has reserved $3.7 million in liability in U.K. value-added tax.

The U.S. bankruptcy code allows the appointment of an independent examiner to examine allegations of fraud or mismanagement by a bankrupt company or its executives. Pillay is a former federal prosecutor and partner at law firm Jenner & Block.

Read more: Celsius Proposes Restructuring to Offer One-Time ‘Meaningful Recovery’ Payout for Most Creditors

UPDATE (Jan. 31, 10:30 UTC): Adds quote from Pillay on "serious problems" and adds detail on executives' CEL sales, unsecured lending levels and tax compliance.