original" Celsius Was Lying ", compiled by Odaily Odaily jk.
By Matt Levine Matt Levine is a Bloomberg Opinion columnist covering finance coverage. He was the editor of Dealbreaker, worked in the investment banking division of Goldman Sachs, served as an M&A attorney for Wachtell, Lipton, Rosen & Katz, and served as an associate judge on the U.S. Court of Appeals for the Third Circuit.
Four U.S. law enforcement agencies sue Celsius and its CEO
A week ago, in a story on Celsius Network , I wrote: "People who care about cryptocurrencies have their own personal 'Why don't these people go to jail?' project top 10 list for the past few years." I think I can cross a name off my list:
The former CEO of bankrupt cryptocurrency lending firm Celsius Network Ltd. has been charged with fraud and has been indicted by three regulators in connection with the firm's collapse.
Alex Mashinsky, 57, has also been charged with attempting to manipulate cryptocurrencies in federal court in New York. The Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC) and the Federal Trade Commission (FTC) have also filed lawsuits against Mashinsky and the company.
Yes! All right. Here are (1) the DOJ's press release , Celsius' non-prosecution agreement , and Mashinski's indictment , (2) the SEC's press release and indictment , (3) the CFTC's press release and indictment , and (4) ) FTC press release and indictment .
We’ve talked a lot about Celsius here, as it’s probably one of the most ridiculously large cryptocurrency companies. Celsius is a cryptocurrency lending platform that offers high yields on customers' cryptocurrency deposits. In an interview with Bloomberg Businessweek, Mashinski explained that the reason why Celsius' rates are much higher than bank deposit rates is not because it is riskier than banks, but because it passes more of the benefits on to customers. “Someone is lying,” Mashinski said. “Either the bank is lying or Celsius is lying.”
Last summer, Celsius froze customer withdrawals and filed for bankruptcy. Currently, there are four standing federal complaints against Celsius detailing its operations and problems, which I discuss below. But all of that is just a footnote to that sales pitch. "Either the bank is lying or Celsius is lying" is everything you need to know about Celsius; a generative AI model can write these four indictments with just that sentence as a cue; everything Celsius actually does somehow contained in this sentence.
Celsius is alleged to have engaged in two related types of investment scams: its business involved getting customers to deposit cryptocurrency into Celsius, promising them a safe return of up to 17%, and then lending it to cryptocurrency hedge funds; The token is a quasi-stock form of Celsius, through which investors can bet on the success of Celsius. The business was allegedly a scam, as Celsius was unable to generate a safe 17% yield (obviously!), and the tokens were allegedly a common low-priced stock promotion scam: Celsius allegedly tried to get people to buy its tokens. currency and exaggerated the advantages of its business. Here's a summary from the SEC:
Celsius markets two core investment opportunities to investors. First, Celsius offers and sells its own crypto asset security, CEL. Defendants promised high rates of return to investors who purchased CEL and promoted CEL as an investment in Celsius' own success. Second, Celsius offers an "earn interest program," where investors deposit their cryptocurrencies into Celsius in exchange for interest payments. Defendants promised returns of up to 17 percent to investors in "interest-earning schemes."
Defendants made a number of false and misleading statements in order to induce investors to purchase CELs and invest in "interest earning schemes." Among other misrepresentations, defendants made misleading statements about Celsius' core business model and investor risk, claiming that Celsius does not make unsecured loans, that the company does not make high-risk transactions, and that interest payments to investors represent 100% of the company's revenue. 80%.
These statements are all false. Celsius is unable to consistently generate sufficient income to cover the required interest payments to investors in connection with the Earn Interest Plan. The company engaged in high-risk transactions and made unsecured loans in an attempt to generate the necessary income, thereby putting the entire Celsius enterprise at serious risk. Celsius failed to succeed, often as a result of paying more than 80% of its revenue to meet the company's interest payment obligations, a business practice that was hidden from investors, was unsustainable, and ultimately led to the company's collapse. These things are intertwined: in order to get customers to deposit, lying to them makes the company appear better to CEL investors, and raising the price of CEL makes Celsius's balance sheet better and thus attracts more customers. (Additionally, Celsius partially pays interest owed to customers in CEL tokens, so the higher the value of the CEL token, the easier it is to pay customers interest.)
Let's start with the business. Celsius advertises to customers that they can deposit cryptocurrencies, and Celsius will pool customers' cryptocurrencies to provide high-quality, low-risk mortgage loans to institutional-level cryptocurrency investors. Celsius will earn interest on these loans and will 80% How can the 80% interest earned on low-risk mortgages be 17%? Celsius somehow provides loans that are both safe and lucrative. Either the banks are lying or Celsius is lying. So which one is it? The SEC stated:
A core tenet of Celsius in promoting its business is that it does not make unsecured loans when utilizing investor funds in "earn interest schemes". Celsius and Mashinski made this claim frequently on a number of different channels. For example, during a livestream event on November 26, 2019, Mashinski said: "I can tell you there are other borrowers in the market who are taking unsecured loans or borrowing from anyone. Well. To them Say fine. We'll never do that."
In fact, Celsius made numerous unsecured institutional-grade borrowings totaling millions of dollars, despite numerous public assurances to the contrary. In fact, Celsius had more than $17 million in unsecured institutional borrowing as of November 2019.
Celsius' unsecured institutional borrowings range from $1.3 billion to $1.96 billion through 2022, representing 34% to 48% of the company's entire institutional-grade borrowing portfolio.
Celsius had enough compliance staff that (1) they knew Mashinski was lying, and (2) they tried to stop him, but there was nothing they could do:
In an exchange on the Slack messaging app, a Celsius executive told a senior employee at the company: "I just told (Mashinski) that the number of unsecured loans is increasing and the overall mortgage ratio to institutions is decreasing. …I will talk to him. I’ve said it many times.” The executive sent the message as Mashinski made comments about the company’s loan portfolio during an AMA event on November 6, 2020. made a false statement.
Mashinsky conducted a weekly live event called "Ask Mashinsky Anything" ("AMA"), in which he would make false statements about Celsius' collateral, which Celsius would later edit to remove the lies:
During an AMA event on May 14, 2021, Mashinski said: “These loans are all collateralized. This means that the institution provides Celsius assets or dollars for our safekeeping before we provide digital assets. This protects the interests of the community and keeps them safe."
Mashinski's May 14 statement was deleted as part of the AMA's editorial process, at the direction of a Celsius executive. The executive recognized the falsity of Mashinski's public statements, noting, "It's critical to remove this portion of the AMA and remove the curated video explanations from everywhere on the Internet."
As a result, Celsius allegedly made false claims about the security of its loans. This is actually very important. When Celsius finally filed for bankruptcy, it reported assets of $4.3 billion (including loans totaling $930 million and a provision for bad debts of $310 million) and customer liabilities of $4.7 billion (total liabilities of $5.5 billion); The loans proved to be far less secure than Celsius had advertised, and therefore failed to provide customers with sufficient funds.
However, Celsius also allegedly falsely advertised the profitability of its loans: while it made risky unsecured loans, it still couldn’t actually generate enough revenue to pay the returns it promised clients:
Mashinski and other Celsius executives feared losing investors if the company lowered the rates it pays participants in “interest-earning schemes.” As such, Celsius sets its rates largely to attract and retain investors, rather than based on the returns it can earn from its business activities.
Contrary to defendants' multiple claims of paying 80% of income to investors, Celsius consistently paid more in interest than the company generated.
This fact was well known to Celsius executives, including Mashinski. For example, in February 2021, Celsius's chief financial officer sent Mashinski a financial document showing that in 2020, Celsius paid $45.7 million in interest (called "incentives") but generated only $42.7 million million dollars in revenue. In other words, Celsius paid over 100% of its 2020 revenue to investors in so-called interest.
In 2021, Celsius paid 23% more interest to investors in its "earn interest plan" than it generated.
So Celsius is telling investors in its quasi-equity CEL tokens that they are making money while losing money is not good. But there's another problem: if you raise money from clients by promising high returns, and then you don't make enough to pay those returns, but you pay anyway... then where do you get the money to pay those returns? If the answer is "Venture capitalists bought stock in your company and used their investment to pay the return" or "Your wealthy CEO invested a portion of his own money to keep the client intact" then maybe or maybe Not to be misleading, depends on your disclosures, but these are basically good answers.
Here's Celsius' answer, of course it's clearly written:
Both Mashinski and Celsius's senior leadership knew the company had a payout ratio of more than 100%, with one executive noting that Celsius was "essentially using user balances to pay user rewards."
This is a bad answer! This has a name! If you do that by raising money from clients and promising 17% returns, and then you don't make enough money to pay those returns, and then you raise more money from new clients and use some of that money to pay the returns, that's a Ponzi scam. Maybe you didn't mean to be a Ponzi scheme, but if you're going around saying "we use user balances to pay user rewards" then you definitely have some idea of what you're doing.
So Celsius told customers it was making safe investments to get high returns, but it allegedly actually made risky investments and also ran some Ponzi schemes to get those returns.
Then there is the CEL token. The SEC stated:
CEL has played a key role in the company since Celsius' inception. In a March 2018 white paper, Celsius described 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 livestream event on March 8, 2018, Mashinski further explained: "We are focused on driving community growth because everything we do is measured in [CEL] tokens." Mashinski Key went on to say: “Token prices go up and our entire compensation is in tokens. So as long as it’s in the best interest of the community, it’s our job to do whatever it takes to increase the token price.”
Mashinski also publicly described the price of CEL as a measure of "Celsius' profitability or operating conditions." In other words, when Celsius succeeds in attracting more users, the price of CEL will rise, and when demand for Celsius' investment services falls, the price of CEL will fall.
Consistent with their public statements, Mashinski and others at Celsius view CEL as similar to stock in a public company. Mashinski wrote in an internal message that he wanted to "be able to talk about CEL as a public company."
On this point, I agree with Mashinski: CEL tokens have somewhat debatable utility (and thus can be considered commodities) ; They are only Celsius shares. When Celsius business is doing well, when people have more faith in Celsius and believe in its future, the price of the token will rise; the token is a bet on the Celsius business. They are like stocks.
So, like any company with publicly traded stock, if Celsius, for example, lied about its business and financial condition, that would be securities fraud. As a result, the SEC cites Mashinski's April 2022 CNBC interview in which he said Celsius had 1.7 million users when it actually had fewer than 500,000. Or in May 2022, Mashinski tweeted that "Celsius has not suffered any major losses and all funds are safe"; at the same time, the SEC stated:
On May 9, 2022, just two days before Celsius and Mashinsky tweeted reassuring statements, a Celsius executive called the company a "sinking ship."
On May 12 and 25, 2022, the same Celsius executive wrote in a Slack exchange: "No hope...no plan" and that Celsius' business model is "fundamentally flawed."
Another employee put it bluntly in an internal message dated May 21, 2022: "We don't have any profitable services."
Mashinski knew there were doubts about Celsius' continued viability. A Celsius executive told Mashinski in a message on May 25, 2022: "We will continue to be in deep trouble for many more months, the asset/liability gap is even worse now, and the balance is lower."
This is a standard case of securities fraud.
Additionally, Celsius allegedly manipulated the price of CEL tokens by secretly buying them on the open market. There is a strange mechanism here as there are two ways to buy and sell CEL tokens. The SEC stated: "Qualified investors in the United States can buy and sell CEL tokens directly to Celsius through the company's over-the-counter trading desk (OTC)." If you buy through the OTC desk, your tokens will be blocked due to securities laws. Locked for one year. But CEL tokens are also listed on various cryptocurrency trading platforms. The trading platform is public, the OTC desk is not, and due to the lock-up period, CEL tokens sold via OTC cannot be traded on the open market immediately. "Because these (OTC) transactions occur on the Celsius platform, they are only reflected in internal records and do not appear on the blockchain or other users of the Celsius platform."
Thus, there is a manipulative trading situation:
1. Celsius can sell 1 million tokens off-market at $1 per token.
2. It can then use the $1 million to buy back slightly less than 1 million tokens on the open market, pushing the price up to $1.05 per token.
3. This is bad for Celsius in terms of corporate finances: it issues more tokens than it buys back; it sells tokens at low prices to buy them back at high prices.
4. However, since Celsius' buybacks reduce the supply on the open market and drive up prices, while its off-market sales do not immediately increase supply in the open market or drive down prices, this creates the possibility of manipulating CEL price increases. Effect.
5. Since Celsius's treasury reserves are primarily composed of CEL tokens (these tokens are only created by Celsius), pushing up the price of CEL will make Celsius look bigger, more reputable, and provide it with more financial flexibility Sex: Driving up the prices of assets you control makes you richer.
6. Also, the next time Celsius sells 1 million tokens off-market, it can be sold at the new market price of $1.05.
Here’s how Celsius described its manipulation plan in the memo, according to the SEC:
An internal memo listed the "main argument" for increasing CEL prices, saying: "We live with the rise and fall of CEL" and that "the more customers use CEL and the more valuable it is, the more value we can extract from it (e.g. using it to pay interest instead of using our cash)".
Internal memo describes plans to raise CEL prices. The program includes examples of value-based buybacks where Celsius will "buy back a percentage of CEL sold over-the-counter on a case-by-case basis, as determined by the specifics of our cash needs". The memo also details plans to add “value” to CEL through Celsius’ increased trading activity:
-The more we sell CEL through OTC
- The more CEL we are able to buy back
- The more attractive the CEL market
-The more CEL bills we can receive
- Ultimately: the more valuable our reserves are
- The less amount of CEL we need to sell, but still the same value of funds raised
It's not exactly a Ponzi scheme, but it's a worrisome business plan. It reminds me of the "box/black box" mentioned in Sam Bankman-Fried's explanation of the easiest way to carry out a cryptocurrency scam. You invent a token, own most of it, let some of it 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 keep the price up, but it increases the book value of all your unsold tokens, making you look very bad on paper rich. If you try to sell all these tokens to achieve wealth, their price will crash - it's just your imaginary token! — you may end up with nothing. But if you have a lot of paper wealth, you can turn it into real wealth in other ways than just selling it. You can mortgage it or not; you just say, "Hey, look, I have billions of dollars in assets, and you can definitely lend me more money."
If you have billions of dollars in CEL in your financial reserves, you can use that as the foundation of your business. You can use these valuable CELs to pay interest to your customers. You can raise cash by selling some off-market CELs subject to a one-year term limit. You can entice customers to lend you real money by saying "our balance sheet is strong, look how valuable our assets are". If you have a lot of assets, you can attract more assets. You may be tempted to manipulate the value of your assets.
By the way! My citations above are primarily from the SEC complaint, although the DOJ, CFTC, and FTC have similar references. This mostly reflects my personal bias: I think this is primarily an SEC case, because to me it feels like a pretty typical securities fraud case. Celsius allegedly did two things:
It told people to "give us your money and we'll invest it for you, making you a 17% profit risk-free," and then lost their money.
It tells people "we're a great business, buy our stock" but it lied and manipulated the price of the stock. The first thing is just a typical investment scam; the second thing is a typical hype and dumping of low-priced stocks. This is standard practice for the SEC, as well as for the DOJ (since the SEC cannot bring criminal charges).
That's my personal opinion, and obviously the SEC's. But in the cryptocurrency space, many people, as well as some in government, believe that neither event constitutes securities fraud. Cryptocurrency exchanges like Coinbase and Gemini have argued that a pooled cryptocurrency lending platform promising interest is not a security. The CEL token may not legally be considered a security, as it is not actually a stock, but a utility token on the Celsius platform. And overall, there’s a jurisdictional scramble where the SEC wants to regulate nearly all crypto tokens as securities and the crypto industry wants the SEC to stay away from cryptocurrencies. So while Celsius may have committed serious fraud on its lending platform and token, there is still a fairly vigorous debate about whether the fraud constituted securities fraud.
But that doesn't matter in the current situation, maybe it's just commodity fraud, but the Commodity Futures Trading Commission (CFTC) is dealing with it. Maybe it's just general fraud against consumers, but the FTC is on to it. Maybe it's wire fraud, but the Department of Justice (DOJ) is dealing with it. Four U.S. federal regulators have collectively said that "whatever fraud you think Celsius is engaging in, we don't like." Other cases can address finer points such as philosophy and jurisdiction. But someone will always take action on Celsius.
