Was Celsius a Massive Scam from the Start?

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On Thursday January 5, New York State attorney general Letitia James filed a lawsuit against former Celsius founder and CEO Alex Mashinsky, charging that he defrauded tens of thousands of customers by promising them unrealistic returns on their investments, while investing their money in highly risky activities that were never disclosed.

Before declaring bankruptcy in July 2022, Celsius was flying about as high as any crypto lender ever got. The firm had raised $1 billion in venture capital, had made serious acquisitions, and featured a magnetic CEO who frequently preached the crypto gospel on social media. Mashinsky portrayed himself as an advocate for underprivileged investors, “not just the 1%”; he was often seen wearing a black T-shirt that said “Banks are not your friends.” In May 2022, the company’s Bitcoin mining unit filed a confidential S-1 in preparation for going public. Ultimately Celsius attracted $20 billion from investors all across the world.

Especially in retrospect, Celsius’s offerings epitomize the realm of “too good to be true.” Celsius promised consumers returns as high as 17%, for doing nothing more than handing over their cash to Celsius. Repeatedly Celsius told customers that their money would be as safe or safer than putting it in a bank.

The New York State lawsuit charges that all of this was a “scheme to defraud hundreds of thousands of investors.” One interesting aspect of New York’s lawsuit: while federal regulators remain unclear about whether to treat cryptocurrency as a security or a commodity, the suit simply makes assertions on the basis of state law. According to the lawsuit, under New York State law, digital assets are commodities, and products that Celsius offered, such as its earned interest account (EIA), are securities. Assuming that those assertions stand up before a judge, Celsius was in violation of the law from the day it began doing business, because it never registered as either a security or a commodity broker.

Even before Celsius declared bankruptcy in July, the company had sent troubling signals. In the late summer of 2021, at least four states—Alabama, Kentucky, New Jersey and Texas—charged that Celsius’s products violated state securities laws. Then in November 2021, the company was forced to suspend its chief financial officer, when he was arrested in Israel along with a group of people charged with sexual harassment and fraud.

Internally, the company was known for taking on dangerous amounts of risk in order to earn those unrealistic returns. One former employee said:

The biggest issue was a failure of risk management. I think Celsius had a good idea, they were providing a service that people really needed, but they weren’t managing risk very well.

According to an extraordinary July 2022 CNBC.com report, many top Celsius employees got part of their salaries in the form of a “cel” token that the company both created and manipulated the price of, according to former employees.

Mashinsky will get his day in court; his attorney told the Wall Street Journal that he “denies these allegations. He looks forward to vigorously defending himself in court.” But it seems like every week brings fresh evidence that much of the crypto universe was built on top of fraud from the outset. And it’s very telling that the important early flags were raised by states, not federal regulators.