The Celsius cryptocurrency platform operated as a pyramid scheme. What are we talking about?
Last September, as part of the Celsius platform’s bankruptcy proceedings, an independent expert, Shoba Pillai, was brought in to examine the platform’s operations. She has now published a report on her work, revealing many curious details about the platform’s operations. In short, Celsius’ operations resembled a traditional pyramid scheme long before it went bankrupt. That is, the company’s management sometimes used funds from new clients to pay off withdrawals for old ones. We tell you more about what’s going on.
As a reminder, the Celsius crypto-platform faced a liquidity crisis in June 2022 due to a sharp drop in the market. The trigger was the temporary decoupling of stETH - a token given to users in exchange for stashable ethers - from regular ETH.
Against this backdrop, some users wanted to get to their coins in stacking and took it upon themselves to withdraw stETH from the platform. Well, since the value of the two assets was different, the Celsius platform would essentially have to shell out its own money to make up the difference in order to allow users to withdraw the crypto. In the end, the withdrawal was closed, well, many users were left with nothing.
About a month later, the company filed for official bankruptcy and joined the long list of cryptoprojects that never made it through the previous year. In addition, a lawsuit was already filed against former Celsius CEO Alex Maszynski in January – he is accused of defrauding investors.
Former Celsius CEO Alex Maszynski
As you can understand thanks to the new findings, Maszynski’s position has become even more precarious.
What happened to the Celsius crypto platform?
After conversations with Celsius employees and with Maszynski himself, as well as a detailed review of company documents, Pillai has drawn the following conclusion.
In all key aspects, from the way Celsius described its contract with customers, to the risks it took with their crypto assets, there was a lot the company didn’t tell its customers.
As a reminder, defrauding customers and investors can lead to liability for a company's management. For example, the US Securities and Exchange Commission has already filed a lawsuit against FTX crypto-exchange founder Sam Bankman-Friede, accusing him of defrauding investors. He allegedly raised funds from investors while remaining silent about his own actions in the form of sending money from the exchange's customers to Alameda Research accounts.
Former Celsius executive Alex Maszynski
Celsius promised customers high investment returns and financial freedom: but in reality, the company manipulated even the price of its own CEL token. In particular, it failed to disclose significant amounts of data to customers – including the risks they faced. That said, many of the people within the company were aware of such practices.
According to Coindesk’s sources, back in April 2022, Dean Tappen, one of the developers of the native CEL token, said that the company’s operations “strongly resembled a pyramid scheme”.
On 12 June 2022, Celsius suspended withdrawals from the platform. Pillai noted that had the company not done so, “deposits from new users would have become the only liquid source of funds to pay off coin withdrawals”. However, this has been practised before. Here is the expert’s quote.
But in some cases between 9 and 12 June, Celsius directly used new customer deposits to fund withdrawal requests.
CEL token price over time
At least during this period, Celsius fully met the definition of a pyramid scheme. In other cases, the scheme was less straightforward. For example, a similar one happened in May-June 2022, when the company was forced to withdraw credit after cryptocurrency yields proved insufficient to fund the buyback of CEL tokens. Overall, as the chart below shows, Celsius’ average debt has been high since as early as 2021, meaning the company was no longer financially stable for about a year and a half before its bankruptcy.
Evolution of the average debt of Celsius
Pillai also confirms this fact in her report: according to her, the first serious problems with the platform began in 2020. That’s when Celsius first used customer funds to cover operating costs. According to an anonymous company manager, the money was also spent on salaries for some executives and increasing Maszynski’s fortune in CEL tokens.
Despite repeated claims that he did not sell CEL, Mashinsky still got rid of 25 million tokens worth at least $68.7 million between 2018 and the company’s bankruptcy. Celsius co-founders Nook Goldstein and Daniel Leon sold CEL for $2.8 million and $9.74 million respectively.
Quote from Maszynski’s action report in which he refused to lower returns to users
In the report, the expert mentioned another important detail: Maszynski consistently refused to lower the rate of return on loans for the platform’s customers. He justified this by claiming that he would soon raise “more capital” with the same ease as the first $20 billion raised.
Given all the established facts, Alex Maszynski could well face serious charges in a US court. We are talking about defrauding clients, illegal use of funds and even running quite a pyramid scheme.
Here’s another funny thing that Decrypt’s representatives told us about. It turns out that the Celsius platform management used QuickBooks to control their finances. This accounting tool is designed for small and medium-sized businesses, but for giants with a turnover of billions of dollars such a tool is not suitable. Ironically, it was also used by the management of the cryptocurrency exchange FTX.
QuickBooks accounting tool interface
We believe that these are quite serious findings, which will definitely affect the future fate of the company's representatives. The proven deception of users and investors will surely lead to serious penalties. So it's up to the prosecutors and the judicial branch of the government to decide what happens next.
Related posts
