The list of alleged lies from former Celsius Network Chief Executive and co-founder Alex Mashinsky is long. And if the lawsuits filed by multiple U.S. agencies Thursday are to be believed, Mashinsky’s campaign of deception – intended to entice users to treat the now bankrupt crypto lending firm like a bank – started at the very beginning.
Mashinsky, along with Celsius’ ex-chief revenue officer Roni Cohen-Pavon, were charged Thursday with fraud by the U.S. Department of Justice (DOJ). The company is also being sued for violating finance laws by the U.S. Securities and Exchange Commission and misleading investors by the U.S. Commodity Futures Trading Commission (CFTC), among other charges. Mashinsky was taken into police custody Thursday.
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In total the DOJ charged Mashinsky on seven counts, including securities, commodities and wire fraud and several conspiracy-related allegations. The Federal Trade Commission (FTC), which sued Celsius for a litany of material misrepresentations, announced it settled with the company in a deal that will “permanently ban it from handling consumers’ assets.” Mashinsky, along with former executives Shlomi Daniel Leon and Hanoch “Nuke” Goldstein, did not agree to the $4.7 billion FTC settlement (one of the largest in FTC history).
Celsius, founded during the initial coin offering (ICO) boom of 2017, was basically a reckless investment firm that misrepresented itself as a kind of “neo-bank” from the start. It was funded almost entirely by customer deposits, which it gambled and lost racking up an over billion dollar deficit by the time it filed for bankruptcy in July, 2022. That is, aside from the $32 million earned from a public sale of CEL, the platform’s “native token.”
Tellingly, according to the CFTC, Mashinsky lied about the ICO too, falsely telling multiple media sources that Celsius actually raised $50 million.
Mashinsky, who claims to have created the Voice over Internet Protocol (VoIP), a precursor to ride-sharing app Uber, was known in the crypto community for his combative attitude. He would redress accusations of fraud and misconduct head on, even responding to small time Twitter accounts. He told the world he was coming for the banks, as if he were waging a kind of crusade others could join by “unbanking” themselves using his platform.
And he offered incentives. Celsius portrayed itself as a zero-risk lending platform where people could store their wealth, and advertised 18% yields on deposits to attract customers (the FTC alleged most users received far less than that, even well before withdrawals were permanently frozen). During weekly hour-long AMAs (aka “ask Mashinsky anything”), according to the regulators’ complaints, Mashinsky lied about an insurance policy – at times stretching the truth to say it had $750 million in coverage for each client.
All of this was meant to paint a picture of Celsius as a new type of financial institution for the new digital age. Over the course of his 1,000+ hours of AMA footage, Mashinsky frequently discussed the risks of “fractional reserve banking,” and also of self-custodying your own crypto. Between the old world of traditional finance and the emerging world of blockchain was Celsius, which was misleadingly represented as a trustworthy, responsible steward of funds.
It was a castle made of sand. According to the FTC, almost everything Mashinsky said to attract customers was false. He said customers would keep legal ownership over the crypto they deposited. Instead, Celsius pooled all its customers’ funds in an “omnibus account,” which was treated as a slush fund. Many former Celsius users are now “unsecured lenders,” hoping to receive back pennies on the dollar in the company’s bankruptcy process.
Mashinsky said Celsius customers would be able to withdraw anytime, but even before the company froze withdrawals, there were countless examples of people having to wait days to receive back their funds.
According to the court filings, Celsius employees spoke up as early as 2019 about the firm’s financial losses and inability to keep track of users’ funds (Celsius did not keep records of intracompany transfers until 2021). The company was losing money paying out insane yields meant to attract new investors and keep assets on the platform, the only way to keep the scam going.
Celsius made Mashinsky and his co-founders Leon and Goldstein millionaires many times over. The company was ultimately brought down by the market crash precipitated by the collapse of the algorithmic stablecoin UST, but at almost no point was it a functioning business, the complaints show. At the very center of its business was a fraud: Celsius executives were making unsecured loans using customer funds and lying about it, as ex-CoinDesk reporter Nate DiCamillo found in 2020.
That they lost money on their outlays (over $1.7 billion in total), that they stupidly found themselves in a position of having to buy CEL on the open market to pay user rewards, that they speculated in decentralized finance (DeFi) expecting to win is almost besides the point. These were incompetent, inveterate gamblers, the complaints show. Worse, they ushered unknowing customers into a sand trap, leaving the ability to deposit funds on Celsius open after withdrawals were shut down and after taking their own money off the platform, the court documents allege.
It's possible Mashinsky believed his own hype, that he thought he could turn around a struggling company by expanding out of its problems or making a few lucky trades. It wouldn't be the first company to try to fake it until it makes it. But if you're going to build a replacement for banks, you better damn well be sure it's secure – and Celsius was a house of cards.
CORRECTION (JULY 14, 2023 – 12:48 UTC): An earlier version of this article incorrectly stated ex-CTO for Celsius Roni Cohen-Pavon was arrested Thursday.