The Celsius Crypto platform is being investigated by at least 40 states over fraud allegations. Financial regulators in Vermont essentially called the crypto lender a Ponzi scheme without ever using the word “Ponzi.”
How many state regulators does it take to screw a bankrupt crypto trading platform? While one could probably do the job on its own, apparently there are 40 states and their financial regulatory agencies gunning after the defunct crypto lending platform Celsius. One of those agencies comes so very close to calling the platform what many other critics have already alleged: a Ponzi scheme.
A Vermont Department of Financial Regulation filing Wednesday laid a massive set of allegations against the crypto lender as it seeks chapter 11 protections in federal bankruptcy court. Last year, around the time when the price of the most popular crypto tokens was reaching its height, the platform was offering as much as 18% interest on its crypto.
But Vermont regulators say this was just all in an attempt to create a protective cloud around gross financial mismanagement of customer’s assets. They claimed the company, through CEO Alex Mashinsky, misled investors about how well the company was doing financially and whether it was complying with securities rules. Regulators revealed that “at least 40 state securities regulators” are involved in a multi-state investigation revolving around the crypto lender.
The filing further alleges that during a meeting with creditors held Aug. 19, that “the company had never earned enough revenue to support the yields being paid to investors. 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.”
Without saying the name, this is pretty much the textbook definition of a Ponzi scheme.
The filing said that while Celsius had first claimed its financial issues were due to the market downturn in May and June, Chief Financial Officer Chris Ferraro told investors Aug. 19 that their insolvency started with losses all the way back in 2020.
The comments from Vermont regulators even mention that the company’s liabilities exceeded their assets all the way back into February of 2019. The filing also claims based on financial data Celsius artificially inflated its holdings of its native CEL token to “enrich Celsius insiders.”
The Vermont regulators used the filing to ask the bankruptcy court to appoint an examiner to investigate Celsius. In a blog post published last week, the company wrote they were asking the court to allow customers “with certain custody and withhold accounts” to allow them to withdraw their assets. They said this would impact tens of thousands of customers.
Jason Stone, the CEO of KeyFi which worked as an asset manager for Celsius, basically alleged the same thing against their old partner in a July lawsuit. The suit argued that Celsius lured new depositors in with high interest rates then used those funds to pay back earlier depositors and creditors.
Of course, Celsius wasn’t ready to let that accusation lie. The platform countersued KeyFi and Stone last month, instead accusing them of robbing Celsius of tens of millions of dollars and losing more through “incompetence.”
Back in June, Celsius was one of the first few crypto platforms to start halting withdrawals as the price of crypto took a nosedive into what’s still being called the ongoing crypto winter. Users were especially concerned with the network’s terms of service which hinted that the company would be hoarding users’ crypto as collateral in case of bankruptcy. The company claimed their main goal was to restore liquidity and preserve their customers’ assets, adding “there may be delays.”
Just a few days after Celsius made its announcement, reports showed that several state regulators, including agencies in Alabama, Kentucky, New Jersey, Texas, and Washington were investigating Celsius. While some states effectively confirmed their investigations, the new number revealed by the Vermont filing would indeed put enormous pressure on the already-beleaguered crypto lending platform. Reports show there are holes in the company’s balance sheet $1.2 billion-wide, and there’s a good chance users who stuck their crypto on the platform won’t ever see their crypto again.