Highlights from the court report detailing Celsius’ Ponzi-like downfall

Celsius Networks used to promise customers ”financial freedom” with a ”community first” company that sold products safer than a bank. ”We are Celsius. We dream big,” was one of the firm’s catchy lines.

Co-founded by serial entrepreneur Alex Mashinsky, the crypto lender reported as much as $5.3 billion in assets under management, lent much of it to other digital asset firms in order to make good on a promised 5% annual return. 

On Tuesday, court-appointed examiner Shoba Pillay came to a very different conclusion about what the now-bankrupt Celsius did.

”From its inception, however, Celsius and the driving force behind its operations, Mr. Mashinsky, did not deliver on these promises,” Pillay wrote in a nearly 700-page report. ”Behind the scenes, Celsius conducted its business in a starkly different manner than how it marketed itself to its customers in every key respect.”

Celsius, according to the report, engaged in the kinds of dubious investment practices long associated with a traditional finance sector that crypto idealists had hoped to eclipse.

Circular lending arrangements, token manipulation, misleading statements and false guarantees, and even the use of customer assets to pay the liabilities of earlier clients — described in the words of Dean Tappen, the firm’s Coin Deployment Specialist, as ”very ponzi like” behavior.

A spokesperson for Celsius did not respond to a request for comment. 

Here is a breakdown of the key findings from the report:

“A dead token”   

Celsius’ token had a rough start.  

Celsius first conducted an initial coin offering back in 2018 for its native CEL token. The lender said publicly during that process that it sold 325 million CEL. That was not true, according to the report. Celsius sold 203 million in its initial coin offering and in private sales combined, causing it to raise just $32 million from the ICO rather than an anticipated $50 million, according to the examiner.  

“Despite its promises of transparency, Celsius debated internally whether to tell its community how the ICO actually turned out but decided not to do so because it feared its community would be upset,” the examiner wrote. 

Celsius told customers that CEL was its “backbone” and former CEO Mashinsky repeatedly equated the value of CEL with the lender’s value, the examiner said. Celsius also used a strategy called a “flywheel” where it would sell CEL tokens in private, over-the-counter transactions and make offsetting purchases in the public market, which it believed would impact the trading price.  

Celsius spent at least $558 million buying its own token on the market, the examiner said.  

“From 2018 through the Petition Date, Celsius transferred at least 223 million CEL from the secondary market to its own wallets, a greater number than the total amount of CEL (203 million) released to the public in the ICO. In effect, Celsius bought every CEL token in the market at least one time and in some instances, twice,” the examiner wrote. 

In the end, that “backbone” of Celsius broke by May 12, 2022 when the price of CEL fell to $0.57.  

Former CFO Rod Bolger called it a “dead token” by the end of May, the examiner wrote.  

Costly one-time bets

Celsius experienced “tremendous growth” in both customers and assets under management from its inception to its peak in November 2021, which was the height of the crypto bull market. It’s also the time when the lender experienced some of its biggest losses, according to the examiner’s report.

“Put simply, while Celsius grew its assets under management, it was not a profitable company,” Pillay said.

As the lender tried to offer higher reward rates than its competitors, it made four major bets that led to a total pre-tax loss of $800 million in 2021.

Celsius lost $288 million from two loans it took out with Equities First Holdings, an institutional investment firm. Celsius pledged both bitcoin and ether as collateral to the investment firm in 2019 and 2020, only to find that Equities First could not return the collateral in 2021 after its value had significantly increased, the report said.

“Equities First loans were necessary not only to fund Celsius’s operations, but also to support the retail loans that Celsius extended to its customers (meaning that Celsius borrowed from Equities First and then loaned the proceeds to its customers),” Pillay said.

Institutional loans were one of the key drivers of revenue for the lender, the report said. From July 2021 through to early 2022, Celsius made unsecured loans to players such as Anchorage, Flow Traders, Galaxy Digital and an FTX subsidiary.

A third of Celsius’s institutional loan portfolio was wholly unsecured and more than half was under-collateralized by July 2021, the report said. Fully collateralized loans began to increase in 2021 and into 2022 but this was only because Celsius was accepting collateral in the form of FTX’s native token FTT as well as the FTX-associated Serum (SRM) tokens, the report said.

Celsius also lost $130 million trying to play the Grayscale Bitcoin Trust (“GBTC”) arbitrage trade where institutional investors would obtain newly issued GBTC shares at par value from Genesis Global Trading and then sell those shares for a premium on the public market after a six-month lockup period.

By February 2021, Celsius had $752 million invested in Grayscale assets with hopes to reap the rewards from a premium that was sitting at over 40%, according to the report. However, the premium soon flipped to a discount before Celsius’s lock-up period ended resulting in substantial losses.

Celsius’s losses were also compounded by failed business relationships with both KeyFi, a defi management platform, and Stakehound, a staking platform, according to the report.

A double down on Tether in particular

According to the report, Celsius’ lending to the stablecoin Tether grew to over $2 billion. The number grew so large that in late September 2021 Celsius’ Risk Committee was concerned that the lending was an “existential risk” because “Celsius’s capital is insufficient to survive a Tether default.”

The loans to Tether were twice Celsius’s credit limit, but other loans to now-bankrupt companies also exceeded the limits Celsius supposedly put on itself: Alameda Research and Three Arrows Capital both borrowed above the company’s credit limit. 

Other loans to Amber Technologies, Dunamis Trading, Kenetic Trading, and Profluent Trading “were all more than their stated credit limits,” as well, according to the report. 

To top it all off, Pillay implies that Mashinsky stretched the truth even further than Celsius’s credit limits, telling people that there were no unsecured loans. Despite that assertion, the company’s unsecured lending ballooned from 14% of Celsius’s institutional lending portfolio in Dec. 2020 to one-third by June 2021, the court-appointed examiner reports. 

Mashinsky misled about cashing out

The Celsius CEO cashed out CEL tokens totaling $68.7 million between 2018 and last July, despite “repeated assertions that he was not a seller of CEL,” Pillay wrote. In one example cited in the report, in November 2021 Mashinsky addressed reports that he had sold CEL in recent weeks, saying that he had bought 30,000 tokens. While he had bought 29,000 CEL tokens, he also sold 344,000 tokens during the prior month.

Some of those sales appear to have been a part of the $558 million in purchases of CEL that Celsius itself conducted, alarming senior managers. Tappen, the employee who characterized some of the behavior as “ponzi like,” noted that customer assets were being spent on CEL in order to bring up the price “to get the valuations to be able to sell back to the company.”

The court-ordered report includes the company’s former CFO at one point writing internally that, “[w]e are talking about becoming a regulated entity and we are doing something possibly illegal and definitely not compliant’”

Celsius owes taxes 

Celsius did not have any “dedicated tax professions for the first three years of its existence,” the examiner found.  

Celsius Mining, the lender’s crypto arm, owed $16.5 million in taxes as of the petition date when Celsius filed for bankruptcy and may owe over $6 million more, the examiner said. The crypto lender specifically owes taxes in Georgia and Pennsylvania, according to the report.  

The examiner found “troubling inconsistencies” between information and witness statements. The company’s lack of processes and general lack of coordination on tax issues resulted in Celsius Mining owing substantial use taxes for mining rigs it deployed in 2022,” the examiner said.  

The examiner also said she did not find any facts that would suggest that Celsius or its business entities “willfully or intentionally failed to pay its tax obligation.” 

Correction: Story updated to reflect that Celsius claimed as much as $25 billion in assets under management at its peak.


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