Celsius top executives withdrew at least $30 million of crypto in 2022 before suspending customer withdrawals as per court documents
According to a financial disclosure form filed in the New York Bankruptcy Court last Wednesday, Celsius’ ex-CEO Alex Mashinky and ex-CSO Daniel Leon allegedly withdrew at least $17 Million in cryptocurrency right before the company halted all customer withdrawals.
According to reports, the executives withdrew the funds in the form of Bitcoin (BTC), Ethereum (ETH), CEL tokens (CEL), and stablecoin USDC.
What is Celsius?
Celsius Network LLC is a New Jersey-based cryptocurrency lending company founded by Alex Mashinky, Daniel Leon, and Nuke Goldstein, in 2017. The company website claims that Alex and Daniel drew up their plan on a coffee shop napkin. At its peak, it was considered to be one of the largest crypto lending platforms with more than $8 billion in loans to clients and almost $12 billion in assets under management.[ii]
Depositors earn interest from qualified cryptocurrencies. Their website is advertising an enticing 17% APY for individual deposits. Interests are paid in crypto which includes the native CEL token. Borrowers can take a loan against their assets at a starting interest of 0.1% APR (annual percentage rate).
What went wrong?
Celsius was using Primetrust as a crypto custodian since March 2020. The relationship ended in June 2021 when Primetrust’s risk team expressed concern over Celsius’ strategy which entails “endlessly re-hypothecating assets” This simply means a specific asset is being loaned over and over to get as much profit as possible. Looking back this was like a harbinger of things to come
On June 13, 2022, Celsius paused all withdrawals, swaps, and transfers between accounts. Extreme market condition was the cited reason. Celsius announced: “We are taking this necessary action for the benefit of our entire community in order to stabilize liquidity and operations while we take steps to preserve and protect assets. Furthermore, customers will continue to accrue rewards during the pause in line with our commitment to our customers”. The price of the CEL token plummeted after the announcement.
The company filed for Chapter 11 Bankruptcy on July 13. This move is a month after pausing all withdrawals. Celsius owes its users more than $4.7 Billion.
What does the future hold for Crypto Financial Companies?
The Celsius debacle affected the crypto market negatively. It was aptly described as the “Celsius contagion”. So much fear and doubt spread into the crypto community. The contagion pushed down the price of BTC and ETH by as much as 14%. Just imagine having a million dollars in the bank and all of a sudden you are not able to get a single penny. This is what exactly happened. The crypto equivalent of a bank run.
Banks in the US have the Federal Deposit Insurance Corporation (FDIC) which protects depositors up to $250,000. Crypto Financial companies don’t have such safeguards. Unless Celsius recovers from its bankruptcy there is a slim chance that investors will recover their money.
It is easy to say that the Celsius investors did not do their homework, but the business looked promising. They even had an office in New Jersey. Unlike some crypto companies that are registered outside of the Federal Government’s jurisdiction. Its CEO is not some anonymous person, but a known businessman who is not afraid to show his face. Nevertheless, it failed despite the good optics.
This bankruptcy will probably start a clamor for more regulatory frameworks to prevent similar issues in the future. This industry is still in its infancy and some teething issues will always arise. Investors should triple-check everything and manage their risks accordingly.
[i] https://gizmodo.com/celsius-execs-cashed-out-bitcoin-price-crypto-ponzi-1849623526
[ii] https://www.cnbc.com/2022/10/06/celsius-executives-withdrew-millions-before-freeze-on-customer-funds.html
