Oh what a tangled web we weave, when first we angle to offer 18% APR on crypto deposits.

A lawsuit filed Thursday in New York State’s Supreme Court claims an asset manager that deployed customer funds for troubled crypto-lending platform Celsius Network has not been paid for its services. The suit contains extremely troubling (if unsurprising) allegations about trading and risk management practices at Celsius as the firm worked to generate the huge returns it promised depositors.

The lawsuit, alongside a recent research report, also cast new light on a pseudonymous Twitter account, @0x­_b1, that became highly influential with the 2020 rise of decentralized finance, or DeFi, tools. The account was regarded as a “whale,” or large crypto holder, but was not widely known to, in fact, be managing assets for Celsius. As the suit was filed, the account “doxed” itself as a group including a DeFi trader and staking strategist named Jason Stone.

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Stone was one of the founders of KeyFi, a firm that agreed in August 2020 to deploy customer funds to DeFi and staking protocols on behalf of Celsius. This in and of itself was one of the overlooked red flags at Celsius, which premised its initial yield strategy on institutional lending but soon began to chase riskier returns through DeFi. That led in at least one instance to multimillion-dollar hacking losses – and it’s increasingly unclear that it generated any real revenue.

In the filing, KeyFi claims it has not been paid money owed from profits generated from its trading activities on Celsius’s behalf. According to the lawsuit, KeyFi was promised “7.5% of ‘Net Profits’ for all staking activity and 20% of Net Profits for DeFi activity.” Crucially, the agreement purportedly specified “profits” as denominated in U.S. dollars.

The suit reinforces some things we already strongly suspected about Celsius’s operation. Most notably, it presents examples of sloppy internal controls and serious disregard for risk to Celsius customer funds. The suit claims, for instance, that in one case “Celsius improperly [accounted] for certain payments owed to customers, resulting in a $200 million liability the company did not even understand how or why it owed.”

Even more dramatically, KeyFi alleges Celsius misled it about hedging activities that shaped trading strategies. KeyFi claims Celsius said it had hedges in place against the risk that the U.S. dollar price of crypto assets owed to customers would rise, but did not in fact have such hedges in place. As described by KeyFi, this meant trading activities that generated profits in dollar terms but involved trading away or locking up crypto assets could still wind up underwater when depositors decided they wanted their ETH or BTC back.

Stranger still, KeyFi claims Celsius denominated profits in dollars under the trading agreement, while Celsius’s obligations to customers were denominated in tokens. That kind of asset/liability mismatch can present extreme and unpredictable risk in finance, and it appears to be the root of the current dispute. According to the KeyFi suit, Celsius cited token-denominated rather than U.S. dollar metrics to claim KeyFi didn’t actually generate any returns that would merit promised royalty payments. Celsius has not yet publicly responded to the suit.

It’s vital to keep in mind that allegations made in a lawsuit like this are just that – allegations, unvetted by anyone other than the plaintiff’s legal team and framed to look good for the plaintiff. The KeyFi suit, as it happens, arrived on the heels of a report from analytics firm Arkham Intelligence that seems to challenge several elements of KeyFi’s account.

Most notably, the Arkham report undermines the suit’s claim that “KeyFi’s investment strategies were extremely profitable.” Instead, according to Arkham’s analysis, dollar returns on KeyFi’s strategies relied entirely on rising values of the underlying assets. In fact, Arkham concludes Celsius would have generated better returns simply by holding customer deposits.

“Had Celsius held these assets instead of sending them to 0x_b1,” Arkham concludes, “their value would have been $1.52 billion – close to $400 million more than what 0x_b1 appears to have returned.”

If true, that’s a bombshell in itself. 0x_b1 has for years now been something of a standard bearer for DeFi as a whole. If the group’s returns were illusory, it could cast doubt on at least some aspects of the entire DeFi project.

And as even KeyFi describes in its own suit, the circumstances are extremely strange. In a traditional finance setting it would be inconceivable for a trading desk to operate merely on assurances that someone, somewhere, was tracking and appropriately hedging its activities. Hedging is so granularly intertwined with trading that such separation makes little sense on its face, and agreeing to such an arrangement does not paint KeyFi in a particularly professional or sophisticated light.

Even leaving that aside, though, Arkham found that KeyFi/0x_b1’s returns began to falter when markets turned against the team. 0x_b1 was repeatedly liquidated on margin longs as the price of ether (ETH) and other assets dropped in early 2021. Arkham claims $61 million of “what appears to be Celsius money” was lost in liquidations against 0xB1.

That strongly suggests an alternate narrative about Celsius and the 0xb1/KeyFi's breakup. Via the lawsuit, KeyFi claims it terminated its relationship with Celsius in March 2021 after discovering and contesting perceived mismanagement. But given that the KeyFi traders’ strategies appeared to fail in the then-slumping market, it wouldn’t be surprising if the team’s real motivations were a bit less altruistic, and a bit more about protecting their own reputation as DeFi deities.