A court-ordered investigation is looking into Celsius Network, a cryptocurrency lender that promised its customers a big 17% return on their deposits every year.
The company’s failure was reportedly inherent in its business model, and its founder and CEO, Alex Mashinsky, has come under fire for fraud.
In June 2022, Celsius halted withdrawals and transfers, blaming “extreme market conditions.” The price of bitcoin had halved in two months, leading to a liquidity crisis.
The company eventually filed for bankruptcy and Mashinsky resigned in September. However, a court-appointed investigation into the company’s practices uncovered more significant problems with its business model.
The examiner’s report, written by former federal prosecutor Shoba Pillay, states that “Celsius Network on a stand-alone basis has been insolvent since inception” (pdf).
According to the report, Mashinsky promised customers that their deposits were safe, but in reality, he and other executives were using those deposits to buy and prop up the company’s native cryptocurrency, CEL.
This maneuver benefited the executives but depleted the company’s liquidity.
There were claims that Celsius was operating as a Ponzi scheme, in which there is no real product and early investors are paid with later investors’ deposits.
While the examiner did not explicitly state if the company met these criteria, her findings implied it. In some instances, new customer deposits were used to fund customer withdrawal requests.
Employee testimony also indicated concerns internally that the company was operating a Ponzi scheme.
The report is expected to add to the pressure on Mashinsky, who has already agreed to the examiner’s report in a deal with federal and state investigators probing him for fraud.
In a separate case, the New York attorney general filed a suit against Mashinsky for defrauding investors in January.
The findings of the court-ordered investigation into Celsius Network reveal that the company was insolvent since its inception and that its business practices were starkly different from how it marketed itself to customers.
There are also allegations that the company was operating as a Ponzi scheme, and its founder and CEO, Alex Mashinsky, is facing fraud allegations.
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