Crypto lender Celsius backed its token, benefiting insiders – the US bankruptcy examiner

SINGAPORE/LONDON, Jan 31 (Reuters) – Bankrupt crypto lender Celsius Network used investor money and customer deposits to back its own token, inflating its balance sheet while two of its founders cashed in millions, a report issued by a U.S. court investigator said. . Tuesday showed.

Crypto lenders like Celsius have boomed during the COVID-19 pandemic, attracting savers with high interest rates and easy access to loans. New Jersey-based Celsius filed for bankruptcy in the US last July, after freezing customer withdrawals from its platform.

U.S. Bankruptcy Judge Martin Glenn, who is overseeing the Chapter 11 case, appointed former prosecutor Shoba Pillay as an independent examiner in September.

She was tasked with investigating allegations by Celsius clients that the company operated as a Ponzi scheme and also reporting on its handling of cryptocurrency deposits.

Reuters could not independently verify the content of Pillay’s report.

Celsius did not immediately respond to Reuters requests for comment, which were sent to multiple addresses including an email listed on Celsius’ website, the public relations firm that represented Celsius during the bankruptcy and CEO Alex Mashinsky’s attorney. The requests were sent overnight in the United States, after the report was published.

Celsius collected crypto deposits from retail customers and invested them in the equivalent of a wholesale crypto market. He raised part of the initial capital to finance his business by creating and selling his own crypto token called “CEL”.

The company told customers it would buy CEL on the secondary market and give it to customers as a reward, the report said. It said this would generate users for the business, while also increasing CEL’s price, which it called a self-sustaining “flywheel”, according to the report.

But since 2020, Celsius has gone on a “buying spree” to push CEL’s price “higher and higher,” the report said.

Celsius did not tell buyers the extent to which it was making a market for CEL, telling them it was getting “on its own.” The sudden jump in the price of the token is actually “primarily due to Celsius’ purchases,” the report said, adding that Celsius spent at least $558 million to buy its token.

“The business model that Celsius advertised and sold to its customers was not the business that Celsius actually operated,” the report said.

“Behind the scenes, Celsius ran its business in a completely different way than it advertised to its customers in every key respect.”

Celsius’ paid out more funds to customers as rewards than it could generate in revenue, the report said. Between 2018 and June 30, 2022, it had customer liabilities of $1.36 billion more than the net income it received from customer deposits, the report added.

The increase in the price of CEL tokens benefited the insiders who held the majority, according to the report. Celsius founder Alex Mashinsky, who is currently facing fraud charges in the United States, made at least $68.7 million in CEL token sales between 2018 and the bankruptcy filing, while co-founder Daniel Leon sold at least $9.7 million in tokens, report said.

Reuters was unable to reach Mashinsky or Leon for comment. Mashinsky’s attorney previously said his client denies the allegations and looks forward to a vigorous defense in court.

In 2022, Celsius employees routinely acknowledged that the token was “worthless” and that the company’s ownership of it could not be liquidated, according to the report.

An Examiner attorney interviewed 34 people as part of the report, including Mashinsky, current and former Celsius employees, its customers and vendors.

Reporting by Rae Wee, Elizabeth Howcroft and Alun John, additional reporting by Tom Westbrook and Dietrich Knauth; Editing: Clarence Fernandez and Louise Heavens

Our Standards: The Thomson Reuters Trust Principles.

Elizabeth Howcroft

Thomson Reuters

Reports on the intersection of finance and technology, including cryptocurrencies, NFTs, virtual worlds and the “Web3” that powers money.

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