US regulators say multi-billion-dollar crypto lender Celsius was operating like a ponzi scheme

In June a multi-billion-dollar cryptocurrency lender called Celsius went bankrupt, with its court filings showing a $1.2 billion black hole in its finances. Celsius was a crypto trading and loan company that at one point boasted over $5 billion in 'assets'. It was only founded in 2017 but rapidly attracted crypto traders and speculators: you could deposit crypto with Celsius with the promise of high-yield returns, or take out a cash loan secured against your crypto holdings.

Then, it spectacularly crashed and burned with well over a billion owed. Almost unbelievably the company tried to put a positive spin on the news—but given that the biggest losers were going to be 'normal' investors, the collapse attracted the attention of both the US Department of Justice and Vermont state regulators, who have begun turning over rocks in order to investigate what happened.

To put it mildly, the regulators don't like what they see. The Vermont Department of Financial Regulation has now filed against the firm in New York, and the state regulator is "especially concerned about losses suffered by retail investors; for example, middle-class, unaccredited investors who may have invested entire college funds or retirement accounts with Celsius." The Vermont state prosecutors support the DOJ's request for a legal Examiner in order to protect such interests.

I'll take you into the weeds in a moment but, of all the legalese and claims to come, here is the single most important line in the filing against Celsius: "This shows a high level of financial mismanagement and also suggests that at least at some points in time, yields to existing investors were probably being paid with the assets of new investors."

This is how a state attorney calls a Ponzi scheme a Ponzi scheme.

The regulators say that Celsius, through CEO Alex Mashinsky and via other channels, made "false and misleading claims" to investors about "the company’s financial health and its compliance with securities laws." Both of which are considered as inducements for retail investors to leave their money in Celsius.

Mashinsky was, until the bankruptcy at least, a bolshy and forward figure who was of course extremely bullish about Celsius. He frequently boasted of how the firm had the capital to back its claims and, when things were going south, continued to insist all was well.

In this context Celsius and its representatives are accused of, among other things, "representations as to the company’s ability to meet its obligations and to safeguard customer assets, when in fact Celsius lacked sufficient assets to repay its obligations at the time such statements were made."

To those of us who live in the normal world, the statements begin to get eye-watering in the sheer amount of money involved here. Celsius apparently experienced losses of "$454,074,042 between May 2 and May 12, 2022." This $450 million loss in 10 days meant depositor funds were not safe, but Mashinsky and Celsius continued to pretend they were financially healthy.

 It's getting hot in here

More serious, for the Ponzi scheme charge at least, is that state regulators say Celsius wasn't financially healthy for around two years before this. Not only had it "experienced catastrophic losses in 2021 and failed to earn sufficient revenue to support returns to Earn Account investors," but testimony from the company's ex-CFO took this even further:

"Celsius admitted, through its CFO Chris Ferraro, that the company’s insolvency started with financial losses in 2020 and through 2021, belying the claims in Celsius’s First Day' declarations that the company’s insolvency stemmed from the fall of the crypto market during spring 2022 and the related "run on the bank," and further demonstrating the falsity of Celsius’s representations to investors."

Under state and federal securities law Celsius was required to provide much more detailed information about its financial condition and risk factors. "Instead, Celsius and its management kept its massive losses, asset deficit, and deteriorating financial condition secret from investors."

Perhaps most amazingly, "Celsius also admitted at the 341 meeting that the company had never earned enough revenue to support the yields being paid to investors." This is the classic of the financial scam business: create artificial yields through new investors attracted by a scheme that gives unusually high yields. This is where the key line, the one that may ultimately damn those involved in Celsius, comes in: "at some points in time, yields to existing investors were probably being paid with the assets of new investors."

If it looks like a duck, swims like a duck, and quacks like a duck… it's probably a duck. The regulator made this filing in the capacity of supporting an Examiner appointment: that is, an independent legal expert who'll have the power and authority to really dig through this stuff, with no stone left unturned. These are not charges yet, but the basis on which regulators believes charges will eventually be brought. One thing does seem abundantly clear: however much heat Celsius created, its creators are going to get a whole lot more back.