Celsius Resembled Ponzi Scheme at Times, Vermont Regulator Says

"... [A]t least at some points in time, yields to existing investors were probably being paid with the assets of new investors."

AccessTimeIconSep 7, 2022 at 2:22 p.m. UTC
Updated Sep 7, 2022 at 8:50 p.m. UTC

Nikhilesh De is CoinDesk's managing editor for global policy and regulation. He owns marginal amounts of bitcoin and ether.

Crypto lender Celsius Network misled investors about its financial health, using its CEL token to bolster its balance sheet and at times using new investor funds to repay old investors, the Vermont Department of Financial Regulation alleged in a new filing Wednesday.

The department, one of several state regulators probing Celsius amid its ongoing bankruptcy proceedings, filed in support of the U.S. Trustee's Office motion to appoint an independent examiner, alleging Celsius has not been transparent about its financials.

The Vermont report is perhaps the most damning assessment of Celsius' management since the lender's collapse this summer helped plunge the global crypto market into a tailspin. The regulator all but alleged that Celsius may have operated at times with a Ponzi scheme-like structure, saying the lender admitted in a recent creditor call that it could not earn enough revenue to support its yields.

"This shows a high level of financial mismanagement and also suggests that, at least at some points in time, yields to existing investors were probably being paid with the assets of new investors," the filing said.

Some 40 state regulators are now looking into Celsius' operations and financials, the filing said.

"During the course of the multistate investigation, it has become clear that Celsius, through its CEO Alex Mashinsky and otherwise, made false and misleading claims to investors about, inter alia, the company’s financial health and its compliance with securities laws, both of which likely induced retail investors to invest in Celsius or to leave their investments in Celsius despite concerns about the volatility of the cryptocurrency market," the filing said.

Celsius was unable to pay repay investors as far back as July 2021, despite what CEO Alex Mashinsky claimed on Twitter or said in interviews, the department alleged.

The company suffered losses in 2021, including when crypto staking platform Stakehound lost access to 35,000 ether (ETH) and when a lender could not return collateral, the filing said.

As a result, the company was "misleading" about its financial health, the filing said, including in its July 2022 bankruptcy filings when Celsius claimed it was filing due to the crypto market's 2022 downturn.

Celsius may have gone so far as to manipulate the price of its CEL token and boost its CEL token holdings to boost its balance sheet, Vermont's regulator alleges.

"By increasing its net position in CEL by hundreds of millions of dollars, Celsius increased and propped up the market price of CEL, thereby artificially inflating the company’s CEL holdings on its balance sheet and financial statements. Excluding the company’s net position in CEL, liabilities would have exceeded its assets since at least Feb. 28, 2019. These practices may also have enriched Celsius insiders at the expense of retail investors," the filing said.

Celsius experienced over $450 million in losses in a 10-day period in May 2022 alone, the filing said.

Due to all of these issues, an independent examiner should investigate Celsius and its operations, the filing said.

"An examiner should investigate whether Celsius improperly deployed assets to manipulate the market price of CEL, thereby artificially inflating the value of the company’s net position in CEL on its balance sheet and financial statements," the Vermont department said.

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Nikhilesh De is CoinDesk's managing editor for global policy and regulation. He owns marginal amounts of bitcoin and ether.

CoinDesk - Unknown

Nikhilesh De is CoinDesk's managing editor for global policy and regulation. He owns marginal amounts of bitcoin and ether.