Crypto lender Celsius misused customer funds for years, examiner finds

Bankrupt crypto lender Celsius misused investor and customer funds for years before its collapse, including to help its founders cash out tens of millions of dollars, a court-appointed examiner said in a new report.

The company founded by Alex Mashinsky promoted itself as an innovative, digital asset alternative to traditional banks, luring customers with interest rates as high as 17 per cent. But it used the money it received from thousands of everyday investors to inflate the price of its own token, CEL, in a scheme an employee described at the time as “very Ponzi like”, according to the report prepared by a law firm appointed by the US bankruptcy court.

Mashinsky himself profited by dumping $68.7mn of CEL, while telling the public he was not selling. Insider sales by Mashinsky and others, which were first reported in a Financial Times investigation in July, were enabled by Celsius buying up the token, using money from its customers and blue-chip investors including Laurence Tosi’s WestCap and Canadian public pension CDPQ.

“We spent all our cash paying execs and trying to prop up Alex [Mashinsky]’s net worth in [the] CEL token,” a former employee told the examiner, according to the report.

The nearly 700-page report by Jenner & Block partner Shoba Pillay, a former US federal prosecutor, highlights the once-prominent crypto lender’s alleged extensive financial manipulation, misrepresentations, tax deficiencies and woeful internal systems and risk controls.

Its findings will raise questions for transatlantic regulators who had close contact with Celsius long before it collapsed but failed to prevent billions of dollars in customer funds getting locked up. The company was rejected by the UK’s Financial Conduct Authority when it applied for registration as a crypto business and forced to move its base to the US in 2021, but not blocked from soliciting customers. Celsius stopped new US customers enrolling in some of its products in April 2022, just two months before it collapsed, after intervention by US watchdogs.

New York’s attorney-general this month sued Mashinsky for allegedly “defrauding hundreds of thousands of investors . . . out of billions of dollars worth of cryptocurrency”. He has denied wrongdoing. Mashinsky’s lawyer did not immediately respond to a request for comment on the examiner’s report.

Beginning in 2020, Celsius operated a scheme it called its “OTC flywheel” where it bought up CEL on the open market and sold it via private “over the counter” transactions, often timing purchases to boost the price, the report said.

“In total, Celsius spent at least $558 million buying its own token on the market . . . In effect, Celsius bought every CEL token in the market at least one time and in some instances, twice,” Pillay wrote.

The report found that Celsius increased its purchases of CEL to allow Mashinsky to cash out of the token. The company’s former chief financial officer expressed concern at the arrangement, according to the report, writing: “[We] are talking about becoming a regulated entity and we are doing something possibly illegal and definitely not compliant.”

Another employee wrote on messaging app Slack: “If anyone ever found out our position and how much our founders took in USD could be a very very bad look.”

Executives at the company also compiled a list of alleged misstatements Mashinsky made in his nonstop marketing efforts for the company, and sometimes edited his regular YouTube broadcasts to customers after the fact to remove sensitive statements.

In addition to enriching insiders, the scheme inflated Celsius’s balance sheet by more than $1.5bn at its peak, because the company held CEL on the balance sheet at market prices, despite “routine” conversations by employees in 2022 that CEL was “worthless” and that its price “should be 0”, the report said.

The CEL scheme sowed the seeds of the company’s undoing when crypto crashed in 2022 and customers withdrew money, meaning Celsius could no longer prop up CEL.

However, the hole in the company’s balance sheet originated as early as the start of 2021, because it did not earn enough money on its lending and business lines to fund the interest rates it promised to customers and its CEL purchases, the report said. The examiner described Mashinsky resisting efforts by some insiders to put the company on a more sustainable footing by reducing payouts to customers.

Celsius filled the hole it discovered in early 2021 by using $300mn stablecoins to buy and borrow bitcoin and ethereum to match the amount of those tokens it owed to customers. The “net deficit” between the amount of coins Celsius customers had deposited and the amount it actually held increased over time to more than $1bn.