Celsius Network, once a titan of the crypto lending world, is in bankruptcy proceedings and facing down claims that it was running a Ponzi scheme by paying early depositors with the money it got from new users. Some of the 1.7 million customers ensnared by the alleged fraud are now directly pleading with the Southern District of New York to help them get their money back.
Christian Ostheimer, a 37 year-old living in Connecticut, wrote in a letter included in court exhibits that he trusted Celsius with his retirement savings and has lost more than $30,000, which has brought him into “unsurmountable tax complications.”
“It is in your hands, honorable judge to make this a different case were not the lawyers, the attorneys, the big corporations and managers get paid out first but the little man, the mom and pop, the college grad, the granny and grandpa — all those many small unsecured creditors — so that they are not like usual at the end of the chain where they lose everything,” writes Ostheimer.
The question of who gets repaid first — should that day ever come — looms heavy over the bankruptcy proceedings.
At its peak in October 2021, CEO Alex Mashinsky said the crypto lender had $25 billion in assets under management. Now, Celsius is down to $167 million “in cash on hand,” which it says will provide “ample liquidity” to support operations during the restructuring process. Celsius owes its users around $4.7 billion, according to its bankruptcy filing.
That filing also shows that Celsius has more than 100,000 creditors, some of whom lent the platform cash without any collateral to back up the arrangement. The list of its top 50 unsecured creditors includes Sam Bankman-Fried’s trading firm Alameda Research, as well as an investment firm based in the Cayman Islands. Those creditors are likely first in line to get their money back, leaving smaller retail investors holding the bag.
Unlike the traditional banking system, which typically insures customer deposits, there aren’t formal consumer protections in place to safeguard user funds when things go wrong.
Celsius spells out in its terms and conditions that any digital asset transferred to the platform constitutes a loan from the user to Celsius. Because there was no collateral put up by Celsius, customer funds were essentially just unsecured loans to the platform.
Also in the fine print of Celsius’ terms and conditions is a warning that in the event of bankruptcy, “any Eligible Digital Assets used in the Earn Service or as collateral under the Borrow Service may not be recoverable” and that customers “may not have any legal remedies or rights in connection with Celsius’ obligations.” The disclosure reads like an attempt at blanket immunity from legal wrongdoing, should things ever go south.
On July 19, Celsius published a document detailing next steps for customers. In it, they say their chapter 11 bankruptcy plan will “provide customers with the option, at the customers’ election, to recover either cash at a discount or remain ‘long’ crypto,” but it is unclear whether customers will ever see their money again.
The entire process lays bare just how much of crypto regulation in the U.S. happens by enforcement.
The Securities and Exchange Commission has effectively become one of the industry’s top regulators in the country, including weeding out Ponzi and pyramid schemes, and it appears that some precedent will be set in U.S. bankruptcy court in coming months as lawmakers deliberate over formal legislation on Capitol Hill.
Pleas from investors
In the hundreds of letters officially submitted to the court, retail investors beg to be put at the front of the line to receive their money back.
Flori Ohm, a single mother of two college-bound daughters, says that her family has been “severely impacted both in financial and mental health” by the bankruptcy which has left her funds stranded on the platform. Ohm, who also supports her parents, says she can’t sleep or focus on work.
“I am struggling hard [to make a] living,” she writes.
Jeanne Y Savelle, who describes herself as a “little retired old lady” living on a fixed income, says she turned to Celsius in search of a way to supplement her monthly Social Security check to stretch her dollar amid record levels of inflation.
“I purchased my small amount of crypto hoping just to earn enough to help me weather a few years, kind of a safety net,” said Savelle. “Yes, I know, buyer beware but I agree that there has been way too much deception.”
Others have lost everything.
California resident Stephen Bralver says he has less than $1,000 left in his Wells Fargo checking account — now his only source of funds to provide for his family since Celsius suspended all withdrawals.
“There is absolutely no way that I can continue to provide without access to my assets at Celsius,” he writes to Judge Martin Glenn, who is overseeing the Celsius bankruptcy proceedings in New York.
“This is an EMERGENCY situation, simply to keep a roof over my family and food on their table,” continues Bralver’s letter.
Sean Moran of Dublin writes that he lost the family farm in Ireland and his family is homeless.
“Can’t believe that they lied to us on the weekly AMA about not trusting banks whilst all along they we’re wolfs in sheep clothing false promises and misleading information.” He continues, “I’m mentally unstable. Family are distraught with my decisions of trusting Celsius and promising them a better future.”
Beyond the financial devastation described in each of these letters, one recurring theme centers around a sense of betrayal over the breach of trust between Celsius CEO Alex Mashinsky and his customers.
Three weeks after Celsius halted all withdrawals due to “extreme market conditions” — and a few days before the crypto lender ultimately filed for bankruptcy protection — the platform was still advertising in big bold text on its website annual returns of nearly 19%, which paid out weekly.
“Transfer your crypto to Celsius and you could be earning up to 18.63% APY in minutes,” read the website on July 3.
Ralphael DiCicco, who disclosed holdings of roughly $15,557 in crypto assets on Celsius, said he was fooled by the marketing.
“I believed in all the commercials, social media and advertising that showed Celsius was a high yield, low risk savings account. We were ensured that our funds are safer at Celsius than in a bank,” writes DiCicco.
“This money is pretty much my life savings…I hope you can find it the best interest of all parties involved to pay back the smaller investors first…before any restructuring occurs,” continued DiCicco.
Travis Rodgers of Phoenix says that he was told on numerous phone calls to Celsius Network, as recently as two days before it locked depositors’ accounts, that there was no danger to client assets and zero probability of bankruptcy. Rodgers says that he recorded several of those calls. He claims his Celsius holdings total $40,000 across eleven cryptocurrencies, including Cardano’s token ADA.
The weekly ask-me-anything events hosted by Mashinsky on YouTube are mentioned in multiple letters, including one sent in by Stephen Richardson, who itemizes the many ways in which he feels Mashinsky deceived the public in order to lure new customers into the scheme.
Richardson says he watched every single Friday AMA since signing up.
“Alex would talk about how Celsius is safer than banks because they supposedly don’t rehypothecate and use fractional reserve lending like the banks do,” writes Richardson. “I currently have six figures worth of crypto locked in my Celsius account unable to be withdrawn, despite Alex’s claims mere hours before withdrawals were closed that nobody has any issue withdrawing from Celsius and that everything you hear to the contrary is simply ‘fud.'”
Some have even contemplated suicide if they can’t retrieve their funds.
Katie Davis appeals to Judge Glenn about the $138,000 that she and her husband have stranded on the Celsius platform.
“The thought of losing that amount of money is horrifying,” Davis writes.
“If I do not get that back, I will end my life as the loss will impact my family and I significantly,” she shares.
Mashinsky did not immediately respond to CNBC’s request for comment.
Read More: Celsius investors owed $4.7 billion beg judge to recover life savings