In January 2021, Daniel Leon, one of the Celsius Network founders, was in a good mood when he posted a video to Twitter addressed to Warren Buffett. The cryptocurrency lender Celsius, which he and Alex Mashinsky had founded in 2017, was benefiting from the skyrocketing price of bitcoin.
With a wry smile, Leon said, “Warren, Warren, Warren,” making fun of the American investor’s doubts about bitcoin and misquoting one of Buffett’s most famous proverbs on long-term investing: “My friends and I are planting a tree of transparent and decentralized cryptocurrencies so that future generations can enjoy the shade of prosperity and financial liberation.”
After only 18 months, Celsius is in danger of filing for bankruptcy. Due to an increase in withdrawal requests, it decided to freeze its customers’ funds in the middle of June, trapping the deposits of millions of investors who had trusted the lender with their savings.
The “Lehman Brothers moment” in the cryptocurrency world has been dubbed the Celsius crisis. It is one of the biggest cryptocurrency companies to have experienced a brutal sell-off in token prices this year as investors fled risky assets in response to rising interest rates. When Terra, a $40 billion cryptocurrency, crashed in May, the gloom grew even stronger. At least a dozen hedge funds, exchanges, and lenders, including Celsius, have failed, preventing client withdrawals, raising capital at fire sale prices, or going out of business.
For its risky bets on unproven ventures, Celsius relied on a steady stream of deposits from retail investors, which it then lent to significant cryptocurrency companies. It claimed the risks were minimal and promised extremely high interest rates. As institutional investors’ demand for loans decreased in 2021, Celsius started to take bigger risks to produce yield. According to current company insiders, the company’s balance sheet currently has a sizable hole in it that could be as large as $2 billion.
A dozen former Celsius employees, as well as clients, investors, and business leaders, were all interviewed for this report. The results show that the company was not well-prepared to weather the market turbulence. The Financial Times’ review of internal documents supports these worries. The business’s own compliance division issued warnings about lax internal controls, inadequate oversight, and potential financial data misrepresentation.
Together, they imply that losses from a string of bad bets and a reckless pursuit of high returns were factors in the failure. Requests for comments were not answered by Celsius.
Now, consumers risk losing their savings. The company advised customers to “hodl,” or hold onto their investments rather than sell them, even as the market fell and Celsius’ native token, CEL, dropped from its peak of $8 in 2021 to under $1 today. However, internal records reveal that Leon and a few of his coworkers had already returned to the company CEL holdings worth millions of dollars. Former workers claim that the US Securities and Exchange Commission has requested the documents that detail these sales.
Legislators and regulators face questions about why they did not take more action to protect common investors in light of the risky practices at Celsius and other businesses that grew during the crypto boom.
We still require investor and market protections despite the fact that cryptocurrency markets may present new avenues for investors and entrepreneurs to engage in trading.
There are indicators that there will be a regulatory crackdown. The SEC chair Gary Gensler, who has previously stated that crypto tokens likely meet the definition of securities, issued a warning to investors the day after Celsius frozen funds: be wary of deals that seem “too good to be true.” The new crypto rules for the EU, according to ECB president Christine Lagarde, “should regulate the activities of crypto-asset staking and lending.”
According to Jeff Dorman, chief investment officer at cryptocurrency investment firm Arca, regulation was unavoidable. He continues, “certainly speeds up the inevitable” because of the turmoil at Celsius and other lenders.
Dark banks of cryptocurrency
One of the many cryptocurrency lenders established during the 2017 digital asset boom is Celsius. It filled a void in the crypto markets for banking services alongside its rivals.
These financial institutions received deposits from clients, lent the money out at higher interest rates, and profited from the difference. However, they were largely unregulated and offered interest rates that were uncommon in conventional finance, unlike mainstream banks. Up until the day it froze customer funds, Celsius offered up to 18% annual interest.
The Celsius business model was unique in that it only provided its highest interest rates to clients who consented to receive their interest payments in the company’s CEL token, an asset over which it exercised significant control.
The largest CEL shareholder, Celsius, listed those holdings as an asset on its balance sheet. It was also a significant token purchaser, buying the CEL interest it owed to clients each week on the open market. According to the crypto analysis company Arkham Intelligence, Celsius has spent $350 million on similar purchases since July 2019.
Avoid being swayed by these low volume flash crash swings.
Others may need money and sell their coins at a loss, but since you’re pursuing financial independence, keep holding onto those coins.
Top executives were selling while the company was buying. Leon sold $1.8 million of CEL back to Celsius on the same day he published his video praising the future of cryptocurrencies, according to Celsius trading records. This was one of Leon’s 16 CEL sales to Celsius between October 2020 and August 2021, which generated $11.5 million in total. Requests for comment from Leon went unanswered.
According to the records, Celsius managers sold more than $40 million in net worth of CEL back to the company starting in October 2020. They only cover CEL purchased or sold through these channels, such as the open market, so they only give a partial picture of the executives’ dealings. Mashinsky stated this year that the original CEL holdings of the Celsius founders were still held by them to a degree of about 90%. The sale of tokens that businesses issue is legal for cryptocurrency entrepreneurs.
Between November 2020 and May 2021, Nuke Goldstein, a Celsius co-founder who refers to himself as “el presidente of innovation,” sold $4.1 million worth of CEL. Goldstein stated that he was requesting consent from Celsius to comment in an email response to the Financial Times. He wrote in a tweet from May that his [CEL] rewards had “created an enormous tax liability (reported as income) and I was selling some to cover and hedge,” adding that he saw “no logic” in claims that Celsius’s founders were profiting from the sale of CEL.
The chief executive of Celsius, Mashinsky, is noted as making a single $500,000 sale in October 2020. Former workers think he used different channels to increase sales. Using open blockchain data, Arkham calculates that he sold $44 million worth of goods through exchanges. Requests for comment from Mashinsky went unanswered. “All @CelsiusNetwork founders have made purchases of #CEL and are not sellers of the token,” he tweeted in December.
Celsius’s unique business strategy included only offering its highest interest rates to clients who agreed to receive a portion of the interest payment in the company’s CEL token. Alamy Stock Image
Mashinsky used rhetoric about corrupt systems and avaricious bankers to promote the company. He asserted that he was bringing financial freedom to his community in video addresses and online Q&As. He previously told the Financial Times that the top one percent was “continually squeezing the other 99 percent to squeeze out more profit.” He claimed that Celsius, in contrast, was returning interest to its clients. In a 2020 interview, he asserted, “We are actually safer than most banks.”
Actually, Celsius was placing risky bets with client money that were akin to those that banking regulators were trying to control after the financial crisis. According to company accounts and former employees, Celsius supported its yields by trading customer funds and investing money in obscure, risky, and novel ventures in the world of decentralized finance, or “DeFi,” as opposed to merely lending money to institutional borrowers. Trading of customer assets has been rejected by the company.
Simon Dixon, an investor in Celsius who also has tens of millions of dollars deposited with the company, claims that investing in DeFi “significantly changed the risk profile of what was happening. [It] gives you very high yield for immensely higher amounts of risk.” He asserts that he is “100% sure” that the balance sheet has a hole, which he attributes to poor bets and a failure to control the company’s explosive growth.
With billions of dollars in exposure starting in 2021, Celsius became a significant source of funding for DeFi projects. According to former employees, it was unable to manage the risks due to its quick entry into DeFi. One former employee recalled traders watching online videos on how to trade in DeFi because of how novel the market was.
Even though there were many mistakes made in the developing market, Celsius developed a reputation for being particularly accident-prone after a number of the projects it backed went wrong, costing it more than $100mn in losses that were made public.
The most embarrassing case involved a project called BadgerDAO that had been compromised in 2021 and had to compensate investors like Celsius by issuing them a new token. With the caveat that they did not sell it, this token granted investors the right to any potential profits and money recovered. Celsius did just that in March. Its requests for a change of heart were denied.
One trader at a significant cryptocurrency brokerage quipped, “Every time there’s a blow up, it’s always Celsius money.”
A red flag
Apprehensions were present inside Celsius. According to former employees and internal documents, the company had jumped headfirst into DeFi in 2020 without conducting adequate due diligence on the projects it was supporting and without proper systems for tracking assets.
Concerns were noted by the compliance team. They created a document in February of last year, which was obtained by the Financial Times, warning that certain employees might have been able to make investments in new funds without getting explicit consent and without being subjected to compliance checks. The document also cautioned staff members against moving assets between funds secretly so as to conceal losses and “obscure the true value” of the assets they are in charge of managing.
The document expressed concern that “the company may be exaggerating its representations of AUM and driving up stock price/token price using false financial information.” Regulators’ scrutiny of Celsius may grow due to its lax governance and lack of controls.
In March 2021, Celsius’s reported assets under management were only $10 billion; by the end of the year, they had increased to $25 billion. Over the course of 2021, the staff increased dramatically from about 150 to over 550. When unused and duplicate accounts were removed, former employees claim the actual number of customers was much lower — in the low hundreds of thousands.
Former workers claim that it was challenging to track Celsius’s assets. Internal databases occasionally provided different AUM figures, and the “freeze” process, which was used to reconcile positions across the company, frequently revealed inconsistencies. On the exchanges it used, the trading desk did the majority of its work manually. One former trader claims, “We were clicking in with billions of dollars like any small trader would with $10.”
These flaws were echoed in a lawsuit submitted last week by Jason Stone, Celsius’s former director of DeFi who worked there from August 2020 to March 2021. Stone, who claims Celsius owes his business, KeyFi, money, asserts that he started managing Celsius’s future billions of dollars under the terms of a “handshake agreement” that wasn’t formally established for months. He alleges that Celsius did not properly hedge against his trading, which led to losses of $350 million, according to Arkham estimates.
Celsius executives were engaged in secret negotiations with a potential savior in the 30-year-old billionaire Sam Bankman-Fried in the days leading up to the freezing of funds in June. His businesses, including the cryptocurrency exchange FTX, have given BlockFi and Voyager, two other struggling crypto lenders that filed for bankruptcy last week, rescue loans. According to a person familiar with FTX’s account of the negotiations, he was ready to offer Celsius a bailout.
At first, FTX executives thought Celsius’s issues were just a matter of liquidity. The business had assured its investors that they would have immediate access to their money, but instead, it had locked up some of their money to earn interest in a region of the Ethereum network where it would take some time to redeem it. FTX was thinking about providing a loan to close the gap.
However, as the discussions went on, the FTX team was astounded by the scope of the issues they found. According to the person familiar with the talks, Celsius disclosed a $2 billion hole in their balance sheet on their fourth call to discuss a bailout. It was never clear to FTX’s negotiators whether the Celsius representatives had a complete understanding of the finances. When Celsius publicly announced it was stopping withdrawals, the negotiations came to an end.
The guardians
Late in 2021, Celsius will celebrate its greatest accomplishment. The company had raised $750 million from Caisse de dépôt et placement du Québec, Canada’s second-largest pension fund, and WestCap, the fund run by former Airbnb and Blackstone executive Laurence Tosi. The company was valued at over $3 billion.
Mashinsky hailed the investment as a sign that established financiers have faith in the business. Despite Celsius’s run-ins with US and British regulators, WestCap and CDPQ invested.
Numerous US state regulators had accused Celsius of engaging in risky trades with customers’ money. It’s still unclear how CEL is governed. There is a legal limbo, claims Dixon. These securities, I ask? Are these securities or not? And what laws are they required to abide by?
The company’s headquarters were moved from London to Hoboken, New Jersey, in June 2021 as a result of disagreements with the UK’s Financial Conduct Authority. The FCA was implementing a new registration process for cryptocurrency companies at the time. As part of its exit announcement, Celsius stated that it had withdrawn its FCA application due to “regulatory uncertainty.” The company, according to two former employees, encountered skepticism from UK authorities. One claims that Celsius should be subject to stricter regulations because the FCA considered it to be a collective investment scheme. FCA opted not to comment.
Despite these problems, WestCap and CDPQ boasted in October about the research they did before investing in Celsius. At the time, CDPQ told the FT, “We are very careful. Our due diligence process is very serious. For this story, Westcap and CDPQ declined to comment.
Some current Celsius investors were hesitant to invest more money in the business. With the help of contributors to his BnkToTheFuture crowdfunding platform and Tether, the stablecoin’s issuer, Dixon had invested in 2020. Yet he chose not to participate in the bigger follow-up round in 2021.
The typical due diligence process we go through can take a month. We weren’t complete after eight months,” he says. “We kept asking for things, but there was just pressure to close without giving us the extra documentation we required.”
Since its June fund freeze, Celsius has largely remained silent. It has stated that it is looking into “strategic transactions as well as a restructuring of our liabilities” in an effort to “stabilize liquidity and operations”. State regulators in the US are looking into the funding halt. On June 22, Tosi of WestCap resigned from the board.
Dixon claims that despite advice to file for bankruptcy, Mashinsky has refused. He claims, “Alex is making every effort to stay out of bankruptcy. He interprets the incident as a warning about how “innocent people” were duped by “incredibly deceptive” advertising. Another way to put it, according to the former Celsius trader, is that Mashinsky “wanted to look like a Robin Hood,” but the business he established was “just a bank in the wild west.”
