Cryptocurrency lender Celsius was “insolvent since inception”

Turns out the Celsius Network, a cryptocurrency lender that promised customers 17% annual yields on their deposits, was indeed too good to be true.

The company halted withdrawals and transfers in June 2022 amid a liquidity crisis, citing “extreme market conditions.” The price of bitcoin had halved in two month’s time. In June, Celsius filed for bankruptcy and its founder and CEO, Alex Mashinsky, resigned in September.

But according to a court-ordered investigation into the company, the falling price of Bitcoin was only part of the problem. Celsius’s failure was, in fact, intrinsic to its business model, the investigators found.

“Celsius Network on a stand-alone basis has been insolvent since inception,” wrote Shoba Pillay, the former federal prosecutor tasked with investigating the company, in a report (pdf) released on Jan. 31.

Mashinsky, who founded Celsius in 2017, spent years slamming critics of his business for spreading “FUD” — crypto-speak meaning “fear, uncertainty, and doubt.” But the examiner’s report appears to vindicate those doubters.

“Behind the scenes, Celsius conducted its business in a starkly different manner than how it marketed itself to its customers in every key respect,” Pillay wrote.

The report says that while Mashinsky promised customers their deposits were safe with Celsius, he and other executives were actually using those deposits to buy and prop up CEL, the company’s native cryptocurrency, while they sold their individual stakes in the coin for profit. The maneuver benefited Celsius’s executives while further depleting their company’s liquidity.

Was Celsius a Ponzi scheme? 

Martin Glenn, the bankruptcy judge for the Southern District of New York, appointed Pillay in part to investigate claims that Celsius was operating as a Ponzi scheme, a specific kind of financial scam in which there is no real product and early investors are paid out with deposits from later investors.

While Pillay did not explicitly say if Celsius met the criteria for such a scheme, her findings implied it.

“In some instances, however, between June 9 and June 12, Celsius did directly use new customer deposits to fund customer withdrawal requests,” Pillay wrote.

Employee testimony included in the report also indicated there were concerns internally that the company operated a Ponzi scheme.

In one case, an unnamed employee wrote in April 2022 that the company’s use of customer coins to buy CEL was “very Ponzi like.” Back in January 2021, another employee named wrote that his title should be “Ponzi consultant,” though he told the examiner this was just a “poor joke” and he wasn’t concerned at the time that the company was, in fact, running a Ponzi scheme.

The report will likely place additional pressure on Mashinsky, who agreed to the examiner’s report in a deal with federal and state investigators probing him for fraud. In a separate case, the New York attorney general in January filed suit against Mashinsky for defrauding investors.