Celsius is doomed: two years of shady manipulation by Crypto institutions

Celsius Network, the world’s largest cryptocurrency lending platform, has been accused of fraud by a former investment manager.

Plaintiff Jason Stone posted on Twitter on July 8, claiming that he maliciously used customer deposits to manipulate the price of his own cryptocurrency, resulting in the freezing of customer assets. However, Celsius refused to admit its mistakes, nor did it admit its own negligence in risk management and other aspects, and even tried to transfer the responsibility to Jason Stone. Therefore, Jason Stone decided to take legal measures to file a lawsuit against Celsius.

Jason Stone said that the investment company “KeyFi” he founded was partially acquired by Celsius in 2020. Since then, he has worked for Celsius for a long time, focusing on staking business and deploying DeFi strategies.

Celsius created the giant whale address “0xb1” in August 2020, and transferred customer deposits to this address for investment, and then handed over to Jason Stone to take the lead in management, and the two parties shared the private key. To this end, KeyFi has also signed a client money management agreement with Celsius, as well as co-founded a new company called “Celsius KeyFi”.

Jason Stone wrote in the indictment that “Because its business model depends on providing depositors with more money than they put in, Celsius must continually absorb new capital to pay off its debts to existing depositors. In other words, Celsius is A Ponzi scheme.”

After realizing the problems, Jason Stone decided to leave in March 2021, but Celsius has so far refused to pay their fair share of profits.

“In light of public speculation about the company’s solvency and my observations that Celsius is loosely tied to the truth, I have brought legal action against Celsius to resolve this longstanding issue,” he said.

Crypto asset lending platform Celsius becomes a shadow of traditional banks

First, Celsius is a crypto asset lending platform that facilitates loans of various crypto assets. The company’s business model is similar to that of a deposit lender, taking money deposits from consumers and then using those funds to provide liquidity to the market through loans and investments. Instead of fiat currency, depositors are handing Celsius to crypto assets.

Simply put, Celsius is like a bank, helping these consumers earn a return on their invested capital, pay the interest they earn, and keep the profits. On top of that, savers face losses if Celsius is unable to invest their money in investments that yield more than the interest owed.

Celsius is like copying a traditional bank, but their terms of service try to protect the company from the same responsibilities as legacy banks.

For example, the terms of service state that any funds do not need to be on the customer’s account to become book property, so Celsius can use those assets however they want.

And unlike traditional depository institutions, Celsius does not insure themselves against any loss of client funds, and they do not insure their clients’ funds by any legal means. Not even lending to consumers based on credit, but only to retail borrowers who deposit crypto assets as collateral.

Like many other crypto-asset businesses, Celsius released its own crypto-asset in March 2018 with a token called “CEL”. Celsius promotes the use of its CEL tokens by opting to receive interest payments from Celsius in the form of CEL tokens at a rate higher than deposits paid by Celsius in other ways. Likewise, customers who use CEL to repay their loans will be charged a lower interest rate.

Finally, all of Celsius’ balance sheets are dollar-based for business operations. As a result, Celsius can pay customers less CEL tokens as interest if the price of CEL tokens rises, and because of the growing demand for crypto lending platforms, Celsius keeps the deposit amount held for its consumers at a very high rate.

Despite the staggering amount of customer deposits, Celsius and its management have little experience trading and investing in crypto assets.

In the summer of 2020, due to DeFi innovation and many novel concepts, many new financial management concepts have been derived. Celsius tried to participate in DeFi but the team lacked professional knowledge, so Celsius tried to hire an expert to handle customer funds to deploy in DeFi protocols.

Looking for DeFi cooperation opportunities, KeyFi is the team’s first choice

In the summer of 2020, Celsius found a collaborating crypto asset trading team, Jason Stone, the founder and CEO of KeyFi. At the time, KeyFi was a highly technical company focused on DeFi deployment and strategy, and it was a huge success. It just so happened that the founders of Celsius and Stone knew each other, so Celsius and KeyFi reached a cooperation agreement, and KeyFi would manage billions of dollars from Celsius customers. Crypto Deposits.

On August 19, 2020, without a formal agreement, Celsius began transferring hundreds of millions of dollars in crypto assets to Stone and his team, who created a new Ethereum wallet address, called the “0xb1” account, Almost all assets transferred by Celsius since then have been deployed to this address by Stone, with Celsius taking full control of the 0xb1 account.

During the time the two worked together, Stone only had access to the 0xb1 account, which was logged into 0xb1 using a VPN, and was a computer account controlled by Celsius. But it didn’t take long for Celsius to provide Stone with direct access to the 0xb1 account. The reason for this was a “DNS attack” on the service provider GoDaddy.com by hackers. Concerned that hackers could completely hijack all of Celsius’ web traffic, in order to protect the 0xb1 account, Celsius provided Stone with the private key to the 0xb1 account so that he could access the account smoothly without the need for a VPN.

  The two parties have not signed a formal contract and only use trust as a trading strategy?

Although the situation of the cooperation between the two parties has changed: the two parties intend to share the profits generated by the huge assets, but the two parties have been delayed without any formal written agreement. That is to say, no matter how much money Celsius transfers to Stone, or entrusts Stone and his team to invest, it is all based on the handshake agreement between the two parties.

In addition, Celsius transferred encrypted assets to Stone for investment, and also used Stone’s name to conduct certain transactions, but did not transfer the assets to Stone’s control. The two parties only agreed to record the profit and loss of such transactions in KeyFi’s profit and loss statement. in order to facilitate profit allocation.

It also reflects the relationship between the two: the two rely on each other, and the money makes them mutually beneficial.

Until October 2020, Celsius and Stone decided to perform the risk management and hedging required for certain DeFi transactions to guard against changes to cryptoassets caused by rising token prices.

At the time, Celsius’ management told Stone that it would monitor Stone’s DeFi activities and deploy certain hedging strategies that could protect against prices, mainly because Stone’s DeFi strategy was based on depositing a large amount of ETH in Ethereum and investing it in DeFi projects that could pay off , to obtain non-ETH-denominated assets.

Just after Celsius and KeyFi jointly managed user funds for more than a month, KeyFi signed an agreement “MOU” in which KeyFi will provide DeFi strategies and a special channel for its employees to Celsius. Before the agreement was signed, Celsius had transferred hundreds of millions of dollars to Stone and his team without any formal written agreement of any kind.

So the situation at the time was that KeyFi agreed to dedicate all of its resources to manage all of its crypto financial resources to manage Celsius’ investments, all of which were not protected by any formal agreement, and of course all of this was based on KeyFi’s belief that its partner Celsius would conduct integrity carried out under the operating conditions.

Until the end of 2020, the two parties will execute the first contract and sign the agreement

Given the success of Stone’s management of Celsius in the past, Celsius was clearly so pleased with Stone that they decided to continue sending funds to Stone to deploy on a weekly basis, and the agreement was officially signed. Around December 31, 2020, a series of two contracts drafted by Celsius formalized the collaboration between KeyFi and Celsius: the Asset Purchase Agreement (APA) and the Services Agreement.

Until January 2021, Celsius has violated the APA and service agreement by refusing to provide KeyFi with accounting and fees for such fees. Before and after the signing of the APA and the service agreement, KeyFi was alarmed by Celsius’ improper business practices, eventually concluding that the business practices within Celsius were so corrupt that he and KeyFi could no longer do business with Celsius.

First, KeyFi is aware that since February 2020, Celsius has conducted a series of transactions that use artificial factors to inflate the price of the CEL token.

Connor Nolan, Director of Token Deployment at Celsius at the time, informed KeyFi that between February 2020 and November 2020 Celsius had used around 4,500 BTC (currently $90 million at the time) on the open market as customer deposits to buy CEL to Raise prices.

Not only that, Celsius induces customers to pay in CEL tokens by offering higher interest rates, and then artificially inflates the price of CEL tokens, so Celsius can pay those who choose to charge interest in CEL tokens customers, and even fewer cryptoassets.

Furthermore, by artificially increasing the price of CEL tokens, Mashinsky personally owned hundreds of millions of dollars worth of CEL tokens at the peak of CEL tokens.

In essence, Celsius is completely manipulating the CEL token market in order to borrow from its vast treasury to create a situation where ostensibly yielding customers are in reality delinquent customers.

As a result, Stone was aware of the scam set up by Celsius, and all of Celsius failed to implement the promised hedging transactions, which also harmed Stone and KeyFi. Celsius failed to properly hedge all of its profitable activity, exposing other customer deposits to billions of dollars in losses on redemption. Internal financial mismanagement can also push the company into bankruptcy.

Even though Celsius pays a portion of interest on deposits in CEL tokens, and other crypto assets such as Bitcoin and Ethereum, for consumers who choose to deposit crypto assets instead of CEL tokens, Celsius is only available in tokens for the underlying to deal with these customers. Then as crypto-assets rose in value, it failed to mark-to-market those assets in its internal ledger, creating a huge hole in its corporate finances.

The bull market is here! The waters are ebbing, and Celsius’ vision is gradually disillusioned?

Celsius failed to update its distributed ledger until 2020-2021 after cryptoassets like bitcoin and ethereum appreciated sharply against the dollar, and its corporate finances masked hundreds of millions of dollars in liabilities that Celsius refused to pay.

In the end, when Jason Stone left Celsius, Celsius’ balance sheet turned into a $200 million hole, and Celsius could not give any explanation or solution. Although the balance sheet continued to show signs of bankruptcy, Celsius still planned to take on more. Multi-client assets, which means Celsius doesn’t intend to stop, but just wants to keep accumulating large amounts of debt to the detriment of all creditors.

In January 2021, the crypto market started a bull market cycle, which resulted in Celsius facing severe exchange rate losses, and when customers tried to withdraw ETH deposits, Celsius was forced to buy ETH on the open market at an all-time high and suffered huge losses.

Faced with a liquidity crisis, Celsius began offering double-digit rates to lure new savers whose funds were used to repay earlier savers and creditors. So, while Celsius continues to present itself as a transparent and well-capitalized business, it is actually a Ponzi scheme on the inside.

By March 2021, it was clear to KeyFi that Celsius’ Ponzi scheme could cause huge financial losses to Celsius and its consumers, which could also cause irreparable damage to KeyFi’s reputation. At the time Celsius had already missed out on its first payment to KeyFi in December 2020, and while Stone had been authorized to buy NFTs as an upfront payment for a share of profits under the agreement, APA and service agreement, Celsius had failed to provide a share of the total profit Specific instructions.

Celsius and KeyFi Officially Defeated

On March 9, 2021, Celsius notified Stone that he would no longer be the CEO of Celsius KeyFi, and Celsius continued to access and control the 0xb1 wallet after Stone left Celsius KeyFi. Celsius CEO Alex Mashinsky used this control for his own personal benefit, which was to transfer valuable non-financial assets from the 0xb1 account to his wife’s wallet.

Because its business model depends on giving savers more money than they put in, Celsius must continually absorb new capital. For example, Celsius was required to borrow about $1 billion from Tether in order to pay off its mounting debt. While Celsius paid 5%-6% interest on the $1 billion loan, it continued to owe customers an ever-increasing amount because it had previously accepted many popular tokens as deposits.

Tether loans, along with other Celsius deposits, were used to mask Celsius’ numbers on the balance sheet. Even so, Celsius has continued to promote its high-interest-rate deposits to entice new savers to give it more money to pay back early depositors.

On June 12, 2022, Celsius announced that due to extreme market conditions, all withdrawals and transfers between accounts are suspended. The drastic action was taken as a last resort because the company no longer had any crypto assets on hand to meet its debts to customers.

Celsius’ previous claim that it “has sufficient reserves to meet its obligations under our comprehensive liquidity risk management framework” has now been either make or break.

As of May this year, customer deposits were worth about $11.8 billion. According to reports, Goldman Sachs is seeking to acquire Celsius’ assets for a low price of $2 billion.

Jason Stone said: “Celsius assured me that their trading team adequately hedged any potential impermanent losses from our activity in the liquidity pool. They also assured me that they had risk management and hedging against the token. price volatility, but in late February 2021 we found out that Celsius lied to us. They didn’t hedge our activity and they didn’t hedge against crypto asset price volatility.”

Currently, Celsius’ balance sheet remains a black box.

Crypto lending platform Nexo tweeted that it could acquire any remaining eligible assets of Celsius at any time, but Celsius did not respond. Some people also pin their hopes on Tether, an early investor in Celsius. However, Tether seems to just want to distance itself from the relationship, saying that “Celsius’ financial crisis has nothing to do with Tether and will not affect its USDT.”

In the era of flooded liquidity, many companies use high yields as bait, crazy marketing to attract money to expand the debt side, and when the loan business cannot meet the use of huge precipitation funds, they start to invest wildly, real estate, listed company claims, VC LP, history will always be strikingly similar.

In every round of bull-bear cycle transition, there will always be people who will experience the pain of deleveraging, and there will always be people or institutions that become the “price” of being sacrificed. After LUNA’s stable DeFi vision is shattered, CeFi will also usher in a moment of disillusionment. And the founder Mashinsky had to bow his head and admit defeat to the market. Where should he go in the future?

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/celsius-is-doomed-two-years-of-shady-manipulation-by-crypto-institutions/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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