Crypto lending firm Celsius accused of being a Ponzi scheme • The Register

A former employee of Celsius Network, the cryptocurrency lending platform that recently suspended all transactions, this week accused the company of operating as a Ponzi scheme in a lawsuit.

Netizens were told that they could earn interest on the cryptocurrencies they put into Celsius. The business has generated this return by investing people’s funds in the cryptocurrency market. Celsius had to make enough money on its transactions to produce these interest charges. When the crypto market crashed last month amid general economic uncertainty, Celsius froze all withdrawals, trades and transfers on its network.

Now, one of his former asset managers has alleged in a New York County Supreme Court filing that it all turned into nothing more than a dirty and unsustainable Ponzi scheme. Jason Stone, CEO and founder of KeyFi, which managed billions of dollars in cryptocurrency investments on behalf of Celsius from August 2020 to March 2021, said Celsius began to crash when prices for digital assets, such as Ethereum and Bitcoin, have soared. at the beginning of last year.

At that point, Celsius customers began withdrawing their holdings to sell at full price and earn a big profit. Celsius, however, would have had insufficient funds to cover these transactions and would have been forced to buy cryptocurrency at a loss to return people’s assets. In an attempt to attract new customers to inject more cryptocurrency into its platform, Celsius has started offering double-digit interest rates.

“[These] the funds were used to repay depositors and previous creditors. So while Celsius continued to present itself as a transparent and well-capitalized company, in reality it had become a Ponzi scheme,” Stone’s KeyFi said in its lawsuit. [PDF] against Celsius. Cash-strapped, Celsius allegedly failed to pay the money that was owed to Stone.

Celsius is thus accused of breach of contract and fraud. “Celsius made materially misleading statements and omissions calculated to lead plaintiff to believe that Celsius was a legitimate business with proper security and truthful disclosures to its customers,” the lawsuit alleged. Stone and KeyFi biz allegedly lost millions of dollars owed for their jobs.

Stone and his KeyFi team managed funds for Celsius from a newly created Ethereum wallet. He was allowed to buy NFTs using money from that account under a prepayment arrangement, we are told. When he resigned in March, the account was taken over by Celsius CEO Alex Mashinsky, who then apparently transferred the NFTs to another wallet owned by his wife, it is claimed.

Celsius took out loans against other coins, such as Tether, in an effort to return customer assets. “The Tether loan, alongside other Celsius deposits, was used to conceal the fact that Celsius is, in fact, insolvent on the balance sheet, with less money in its coffers than it owes its depositors. “, it was alleged.

Unfortunately, the stablecoin Tether lost its peg to the dollar and crashed in May 2022, causing a wave of effects in the broader cryptocurrency market. Celsius suspended all withdrawals and transfers between accounts a month later, accusing it of “extreme market conditions”.

“Celsius took this drastic step because she didn’t (and still does not) has sufficient crypto-assets to balance obligations to its clients. Just days before that announcement, on June 7, 2022, Celsius asserted that it “has sufficient reserves to meet its obligations, as required by our overall liquidity risk management framework.” It turned out to be a lie. This lie was also consistent with representations made by Celsius to the plaintiff regarding its risk management,” the lawsuit said.

The register asked Celsius for a comment. ®

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