Original article "Celsius Was Lying", compiled by Odaily jk.
Original author: Matt Levine, a Bloomberg opinion columnist responsible for financial reporting. He was previously an editor at Dealbreaker and served in Goldman Sachs' investment banking division, as well as an M&A lawyer at Wachtell, Lipton, Rosen & Katz, and an assistant judge at the U.S. Third Circuit Court of Appeals.
U.S. Four Major Law Enforcement Agencies Bring Lawsuits Against Celsius and its CEO
A week ago, in an article about Celsius Network, I wrote, "Over the past few years, people who follow cryptocurrencies have had their own personal 'Why aren't these people in jail?' top-ten list." I think I can cross one name off my list:
The former CEO of bankrupt cryptocurrency lending company Celsius Network Ltd. has been charged with fraud and faces lawsuits from three regulatory agencies in connection with the company's collapse.
Alex Mashinsky, 57, is also accused of attempting to manipulate cryptocurrencies in federal court in New York. The Securities and Exchange Commission (SEC), the Commodities Futures Trading Commission (CFTC), and the Federal Trade Commission (FTC) have also filed lawsuits against Mashinsky and the company.
Here are (1) the press release from the Department of Justice, the non-prosecution agreement from Celsius, and the indictment from Masinsky, (2) the press release and complaint from the SEC, (3) the press release and complaint from the CFTC, and (4) the press release and complaint from the FTC.
Here, we have had a lot of discussions about Celsius because it may be one of the most absurd large cryptocurrency companies. Celsius is a cryptocurrency lending platform that offers high yields on customers' cryptocurrency deposits. In an interview with Bloomberg Businessweek, Mashinsky explained that Celsius' interest rates are much higher than bank deposit rates not because it is riskier than banks, but because it passes on more of the returns to customers. Mashinsky said, "Someone is lying, either the banks are lying or Celsius is lying."
Last summer, Celsius froze customer withdrawals and filed for bankruptcy. There are currently four long-term federal complaints against Celsius, describing its operations and issues in detail, which I will discuss below. However, all of these are just a footnote to that sales pitch. "Someone is lying, either the banks are lying or Celsius is lying" is everything you need to know about Celsius; an AI model generated with just this sentence as a prompt could draft those four complaints; everything Celsius actually does is somehow contained within this sentence.
It is alleged that Celsius has engaged in two related investment scams: its business involves having customers deposit their cryptocurrency into Celsius, promising them up to 17% secure returns, and then lending it to cryptocurrency hedge funds; and its token is a quasi-stock form of Celsius, allowing investors to bet on Celsius' success through the token. The business is allegedly a scam because Celsius cannot generate the secure 17% returns (obviously!), and the token is alleged to be a common penny stock promotion scam: Celsius allegedly exaggerated the advantages of its business to get people to buy its token. Here is a summary from the SEC:
Celsius marketed two core investment opportunities to investors. First, Celsius offered and sold its own cryptocurrency security CEL. Defendants promised high returns to investors who purchased CEL and promoted CEL as an investment in Celsius' own success. Second, Celsius offered an "Earn Interest Program" where investors could deposit their cryptocurrency with Celsius in exchange for interest payments. Defendants promised returns of up to 17% to investors in the "Earn Interest Program."
The defendant made numerous false and misleading statements in order to lure investors to purchase CEL and invest in the "Earn Interest Plan". Among other false statements, the defendant made misleading statements about Celsius' core business model and investor risks, claiming that Celsius does not engage in unsecured loans, the company does not engage in high-risk transactions, and that the interest paid to investors accounts for 80% of the company's revenue.
These statements are all false. Celsius is unable to generate sufficient income to cover the required interest payments to investors associated with the "Earn Interest Plan". The company engages in high-risk transactions and makes unsecured loans in an attempt to generate the necessary income, thereby exposing the entire Celsius enterprise to significant risk. Celsius has failed to succeed, resulting in the often payment of more than 80% of its income to meet the company's interest payment obligations, a business practice that was concealed from investors, is unsustainable, and ultimately led to the collapse of the company. These things are intertwined: in order to encourage customers to deposit, lying to them makes the company look better in front of CEL investors, and raising the price of CEL makes Celsius' balance sheet look better, thereby attracting more customers. (In addition, Celsius partially pays interest owed to customers in the form of CEL tokens, so the higher the value of CEL tokens, the easier it is to pay customers' interest.)
Let's start with the business. Celsius promotes to customers that they can deposit cryptocurrency, Celsius will pool customers' cryptocurrency and provide high-quality, low-risk secured loans to institutional cryptocurrency investors, Celsius will earn interest from these loans and pass on 80% of the interest to customers, but how can low-risk secured loans generate 80% interest reaching 17%? Celsius somehow offers both safe and lucrative loans. Either the banks are lying or Celsius is lying. Which one is it then? SEC states:
One core principle Celsius promotes in its business is that it does not engage in unsecured loans when utilizing investor funds through the "Earn Interest Plan". Celsius and Mashinsky have repeatedly made this claim through various channels. For example, in a live event on November 26, 2019, Mashinsky said, "I can tell you, there are other borrowers in the market who do unsecured loans or borrow from anyone. Good. They do it. We will never do that."
In fact, despite many public assurances to the contrary, Celsius has engaged in numerous unsecured institutional loans totaling millions of dollars. In fact, by November 2019, Celsius' unsecured institutional loans had exceeded $17 million.
By 2022, Celsius' unsecured institutional loan amount ranged from $1.3 billion to $1.96 billion, accounting for 34% to 48% of the company's entire institutional loan portfolio.
Celsius has enough compliance personnel that:
In a conversation on the Slack messaging application, a Celsius executive informed a senior employee of the company, "I just told [Mashinsky] that the amount of unsecured loans is increasing while the overall loan-to-value ratio with institutions is decreasing... I will talk to him. I've said it many times before." This message was sent by the executive because Mashinsky made false statements about the company's loan portfolio during the AMA event on November 6, 2020.
Mashinsky conducts a weekly live event called "Ask Mashinsky Anything" (AMA), where he makes false statements about Celsius' collateral, which are later edited by Celsius to remove these lies:
In the AMA event on May 14, 2021, Mashinsky said, "These loans are all secured. This means that the institutions provide assets or dollars to Celsius before we offer them digital assets for custody. This protects the community's interests and ensures their safety."
Mashinsky's statement on May 14 was deleted as part of the AMA editing process, at the direction of a Celsius executive. The executive recognized the falsehood of Mashinsky's public statements and noted, "Removing this part of the AMA and scrubbing the planned video explanation from everywhere on the internet is key."
Therefore, Celsius is alleged to have falsely advertised the security of its loans. This is actually very important. When Celsius ultimately filed for bankruptcy, it reported assets of $4.3 billion (including $930 million in loans and $310 million in bad debt reserves), while customer liabilities amounted to $4.7 billion (total liabilities of $5.5 billion); it turned out that these loans were far from as safe as Celsius had advertised, and therefore could not provide sufficient funds to its customers.
However, Celsius is also alleged to have falsely advertised the profitability of its loans: despite engaging in high-risk unsecured lending, it still couldn't generate enough income to fulfill its promised returns to customers:
Masinskey and other Celsius executives were concerned that reducing the interest rates paid to participants in the "Earn Interest Plan" would result in investor attrition. Therefore, Celsius largely set its rates to attract and retain investors, rather than based on the returns it could generate from its business activities.
Contrary to the repeated claims of paying out 80% of the income to investors, Celsius consistently paid out more interest than the company generated in income.
This fact was well known to Celsius executives, including Masinskey. For example, in February 2021, Celsius' CFO sent Masinskey a financial document indicating that in 2020, Celsius paid $45.7 million in interest (referred to as "rewards"), but only generated $42.7 million in income. In other words, Celsius used over 100% of its income in 2020 to pay the so-called interest to investors.
In 2021, Celsius paid out 23% more interest to investors in the "Earn Interest Plan" than it generated in income.
Therefore, Celsius is not doing well because it tells its investors about the CEL token while it is losing money. But there is another issue: if you raise funds from customers by promising high returns and then your income is not enough to pay those returns, but you still pay... where do you get the money to pay those returns? If the answer is "venture capitalists buy shares in your company and use their investment to pay the returns", or "your wealthy CEO invests some of their own money to keep the customers whole", that may or may not be misleading, depending on your disclosure situation, but those are basically good answers.
Here is Celsius' response, which clearly states:
Mashinsky and senior Celsius management are well aware that the company's payout ratio exceeds 100%, with one executive stating that Celsius "basically uses customer balances to pay customer rewards".
This is a bad answer! This has a name! If you raise funds from customers and promise a 17% return, then you don't make enough money to pay those returns, and then you raise more funds from new customers and use some of that money to pay returns, that is a Ponzi scheme. Maybe you're not intentionally running a Ponzi scheme, but if you go around saying, "we use customer balances to pay customer rewards", then you certainly have some understanding of what you're doing.
Therefore, Celsius tells customers that it is making safe investments for high returns, but allegedly it is actually making high-risk investments and running some kind of Ponzi scheme to achieve those returns.
Then there is the CEL token. The SEC states:
Since its inception, CEL has played a vital role within Celsius. In a white paper dated March 2018, Celsius describes CEL as the backbone of the Celsius Network. CEL is a token that unlocks discounts and features on the Celsius platform, so the more people want to use the platform, the higher the demand for CEL.
In a live event on March 8, 2018, Mashinsky further explained, "We focus on driving community growth because everything we do is measured by the [CEL] token." Mashinsky goes on to say, "Token goes up, our whole compensation is in tokens. So, as long as it makes sense for the community, our job is to do everything we can to increase the token price."
Maksinski also publicly describes CEL's price as a measure of "Celsius' profitability or operational performance." In other words, when Celsius successfully attracts more users, the price of CEL will rise, and when the demand for investment services in Celsius decreases, the price of CEL will fall.
In line with their public statements, Maksinski and others at Celsius see CEL as similar to a publicly traded stock. Maksinski wrote in internal messages that he hopes to "be able to talk about CEL like a public company."
At this point, I agree with Maksinski's view: CEL tokens have a certain level of controversial utility (and can be considered as commodities); they can perform some operations on the Celsius lending platform, but in reality, they are just stocks of Celsius. When Celsius performs well, when people have more confidence in Celsius and believe in its future, the price of the tokens will rise; the tokens are bets on Celsius' business. They are like stocks.
Therefore, just like any publicly traded company with stocks, if Celsius, for example, lies about its business and financial condition, it is securities fraud. Thus, the SEC referenced Maksinski's statement in his April 2022 CNBC interview, where he claimed Celsius had 1.7 million users when in reality, there were fewer than 500,000 users. Or in May 2022, when Maksinski tweeted that "Celsius hasn't suffered any significant loss, and all funds are safe"; meanwhile, the SEC stated:
On May 9, 2022, just two days before Celsius and Maksinski posted reassuring statements on Twitter, a Celsius executive referred to the company as a "sinking ship."
On May 12 and 25, the same Celsius executive wrote in Slack communications, "No hope... no plan," and that Celsius' business model was "fundamentally flawed."
Another employee boldly stated in an internal message on May 21, 2022: "We have no profitable services."
Masinski understood that Celsius' continued viability was questionable. A Celsius executive told Masinski in a message on May 25, 2022: "We will continue to struggle for several months, and the asset/liability disparity is now more severe with lower balances."
This is a typical case of securities fraud.
Additionally, it is alleged that Celsius manipulated the price of its CEL token by secretly buying it on the public market. There is a peculiar mechanism at play here because there are two ways to buy and sell CEL tokens. The SEC states: "U.S. qualified investors can directly purchase and sell CEL tokens from Celsius via the company's over-the-counter (OTC) desk." If you purchase through the OTC desk, your tokens will be locked for one year due to securities law reasons. However, CEL tokens are also listed on various cryptocurrency exchanges. Exchanges are public, while the OTC desk is not, and CEL tokens sold through the OTC desk cannot be immediately traded on the public market due to the lockup period. "Because these (OTC) trades occur within the Celsius platform, they are reflected only in internal records and do not appear in the blockchain or to other Celsius platform users."
Therefore, there is a manipulative trading scenario:
1. Celsius can sell 1 million tokens over-the-counter at $1 per token.
2. Then, it can use the $1 million to buy back slightly less than 1 million tokens on the public market, pushing the price up to $1.05 per token.
3. This is unfavorable for Celsius from a corporate finance standpoint: it issued more tokens than it bought back; it sold tokens at a low price and bought them back at a high price.
4. However, because Celsius' buyback reduces the supply on the public market and raises the price, while its over-the-counter sales do not immediately increase the supply or lower the price on the public market, this results in the manipulation of CEL price.
5. Since the funding reserves of Celsius are mainly composed of CEL tokens (which are created by Celsius itself), increasing the price of CEL will make Celsius appear larger, more reputable, and provide it with more financial flexibility: increasing the price of the assets you control will make you richer.
6. In addition, when Celsius sells 1 million tokens over-the-counter next time, it can be sold at a new market price of $1.05.
According to SEC, the following is how Celsius describes its manipulation plan in the memo:
An internal memo lists "main arguments" as increasing the CEL price, stating, "We have a mutual symbiosis with CEL," "The more clients use CEL and the higher its value, the more value we can extract from it (e.g., using it to pay interest instead of using our cash)."
The internal memo describes the plan to increase the CEL price. The plan includes examples of value-based buybacks, where Celsius will "repurchase a certain percentage of CEL sold through OTC sales on a case-by-case basis, depending on our specific cash needs." The memo also outlines the plan to give "value" to CEL through increased trading activity on Celsius:
-The more CEL we sell OTC
-The more CEL we can buy back
-The more attractive the CEL market becomes
-The more CEL buy orders we receive
-Ultimately: our funding reserves become more valuable
-The fewer CEL we need to sell, but the value of the funds raised remains the same
This is not exactly a Ponzi scheme, but it is a concerning business plan. It reminds me of the "box/black box" explanation by Sam Bankman-Fried on the easiest way to run a cryptocurrency scam. You invent a token, own the majority of it, let a portion trade on public exchanges, and manipulate the price to keep it high. This manipulation costs you money as you buy your own tokens at irrational prices to maintain the upward price movement, but it increases the book value of all the tokens you haven't sold, making you appear very wealthy on paper. If you try to cash out all those tokens to realize the wealth, their price would collapse - they're just tokens you made up! - and you could end up with nothing. But if you have a substantial book wealth, you can convert it into real wealth in other ways, not just by selling it. You can use it as collateral, or even without collateral; you'd simply say, "Hey, look, I have billions of dollars in assets, surely you can lend me more money."
If you have billions of dollars in CEL tokens in your financial reserve, you can use that as a business foundation. You can use these valuable CEL tokens to pay interest to customers. You can raise cash by selling some off-exchange CEL tokens that are subject to a one-year lock-up. You can attract customers to lend you real currency by saying, "Our balance sheet is strong, look at how valuable our assets are." Having a substantial asset base allows you to attract more assets. You may be tempted to manipulate the value of your assets.
By the way! The quote above is mainly from the SEC's complaint, although the Department of Justice, Commodity Futures Trading Commission, and Federal Trade Commission also touch on similar content. This primarily reflects my personal bias: I see this as primarily an SEC case because, to me, it feels like a very typical securities fraud case. Celsius is alleged to have done two things:
It told people, "Give us your money, and we will invest it for you and make a risk-free profit of 17%," but it lost their money.
It told people, "We are a super awesome company, buy our stock," but it lied and manipulated the stock price. The first thing is just a typical investment scam; the second thing is a typical penny stock manipulation and dump. Both of which are standard practices for the SEC and apply to the Department of Justice as well (since the SEC can't bring criminal charges).
This is my personal opinion, and it is obviously the SEC's opinion as well. However, in the field of cryptocurrency, many people and some government officials believe that neither of these things constitutes securities fraud. Cryptocurrency exchanges like Coinbase and Gemini argue that a pooled cryptocurrency lending platform promising interest is not a security. And the CEL token may not be considered a security under the law because it is not actually a stock but a utility token on the Celsius platform. And overall, there is a jurisdictional battle, with the SEC wanting to regulate almost all cryptocurrency tokens as securities while the cryptocurrency industry wants the SEC to stay away from cryptocurrency. Therefore, despite the possibility of serious fraud on its lending platform and token, there is still a heated debate about whether this fraud constitutes securities fraud.
But in the current situation, that doesn't matter! Maybe it's just commodity fraud, but the Commodity Futures Trading Commission (CFTC) is handling it. Maybe it's just general consumer fraud, but the Federal Trade Commission (FTC) is handling it. Maybe it's telecom fraud, but the Department of Justice (DOJ) is handling it. Four U.S. federal regulatory agencies have collectively stated, "We don't like Celsius, regardless of what kind of fraud you think it's engaged in." Other cases can resolve philosophical and jurisdictional details. But someone will always take action against Celsius.
