Crypto Lender Celsius Accused of Being ‘Ponzi Scheme’
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Celsius Network, the crypto lender that froze assets last month, used customer funds to manipulate the price of its proprietary token and lost hundreds of millions of dollars by failing to hedge risk, a former money manager for the company said in a lawsuit.
Celsius amassed more than $20 billion in assets by offering interest rates as high as 18% to customers who deposited their cryptocurrencies. Founder Alex Mashinsky dismissed skepticism about whether that was sustainable, saying the company was able to earn high rates itself.
But Celsius was in fact struggling to cover the payouts and suffered “severe exchange rate losses” due to the fluctuating values of different coins, according to a complaint filed Thursday in New York state court by KeyFi Inc., the company founded by the former money manager, Jason Stone.
Stone, who called Celsius a Ponzi scheme in the complaint, said it cheated him out of potentially hundreds of millions of dollars in pay.
A spokesperson for Celsius didn’t immediately respond to a request for comment. Kyle Roche, KeyFi’s lawyer, declined to comment.
Read More: Crypto Debacle at Celsius Rattles Market Already Shaken by Terra
The allegations come amid a credit crisis in cryptocurrency markets. Hedge fund Three Arrows Capital was ordered into liquidation last month, broker Voyager Digital Ltd. filed for bankruptcy this week and other firms offering high-yield products including Babel Finance and Vauld have suspended withdrawals.
Celsius’s customers have been unable to access their funds since June 12. The company said on June 30 that it’s considering restructuring its debts.
More than a million people entrusted their savings to Celsius, according to the company. The appeal was obvious: The rates it paid were tens or hundreds of times higher than traditional savings accounts.
Behind the scenes, Celsius was investing customer funds in risky trading strategies, without proper controls, according to the lawsuit. Starting in August 2020, Celsius started transferring hundreds of millions of dollars to Stone’s company, KeyFi.
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Though the two firms didn’t have a written agreement, Stone was given the private cryptographic keys to the funds, meaning he could have run off with them, according to the complaint.